Swing trading has become very popular recently, although it has been around for a long time.
Despite the considerable age of the trading method, its active use among traders began several decades ago, so some traders consider swing trading a new trend in online trading. So today we will see what is swing trading, will discuss some swing trading strategies and the main advantages of this approach.
What is swing trading?
Before talking about swing trading and its main principles, let`s address the notions swing high and swing low levels. The price of any asset cannot rise or fall constantly. The nature of the price movement is progressive and it moves from one point to another hitching. After growth, there is a slight decrease. If the areas where the rate is rising more than the areas where it is falling, the market is in an upward trend. If the price decreases more than it rises after that, the downtrend dominates.
Local extrema of the price, its extreme points on the chart are nothing but swing-high and swing-low levels.
Swing trading involves making money on the cyclicality of market movements. Swing low levels are support for the price, and swing high levels are the resistance. The general principle of swing trading is to determine the levels and opening long positions from the swing low point, and shorting from the swing high level. At first glance, it seems that the trading strategy is very simple, although it is not in reality.
Swing style trading is usually carried out on daily and less often on 4-hour time frames. Positions are held from several days to several weeks. A trader only needs to assess the market situation once a day to decide whether to enter the market with a new position or to close the current one. This technique saves participants from excessive trading, which is especially common for beginners. Using the swing trading method, there is no need to sit at the monitor for hours and look for signals, as scalpers do.
Swing trading is trading on price fluctuations. This technique can include trading inside channels or trading on the rebound from trend lines, which are formed by local extrema.
The general principle of swing trading is that all local price extrema are not formed by chance. These are the places where the price has not been able to break through further, so it is obvious that they have a special power. Usually, when the price approaches the support level (swing low in the past), the trader expects that the price will bounce from it again and will rise. The same happens with resistance levels.
The provisions, principles, goals of swing trading are embodied at each of its stages. In general, the algorithm includes:
Stage 1 - Market analysis. In classical swing trading is meant the definition of the Active Trader Zone (AZT), which allows us to make a preliminary assessment of the price behavior and consider the probability of options for further development of the situation. An example of AZT construction is a traditional combination of moving averages for swing trading, exponential with period 20 (slow), and simple with period 10 (fast). Finding the price in the area between them is considered to be the optimal depth of retracement with the further search for a signal to enter, outside the EMA (30) indicates a significant depth of correction and the probability of trend change (or at least transition to the consolidation phase).
Stage 2 - identification of the market phase. In swing trading, the theory of the four phases that make up the market cycle is often used. The first 2 are - consolidation (range) after an upward or downward movement, 2 - trends: "bullish" (price rise), and "bearish" (price fall). During the flat, the player is out of the market, in standby mode, after the start of the trend areas - looking for their confirmation, swing and a good time to open a position.
Step 3 - receiving confirmation of the reversal. The transition from the phase of range to the directed movement or definition of the point of trend reversal requires accurate identification. Otherwise, there is a risk of opening a counter-trend position with a high probability of loss. In practice, different variants are used, for example, the 3-step reversal model proposed by B. Sperando (breaking through the current trend line - formation of a new peak with subsequent testing of the formed level - breaking through the previous extremum in the opposite direction), the formation of strong candlestick reversal patterns, obtaining oscillator signals.
Stage 4 - getting trading signals and their confirmation, for example, by volumes. Various tactics are used in swing trading, such as trading by levels, volatility analysis, use of oscillator signals, etc. All trading strategies generate signals to enter the market and close positions. The authenticity of the signals is also confirmed by different methods, among which one of the best is the confirmation by volumes. These data facilitate phase identification, demonstrate the current level of liquidity, allow to get an accurate interpretation of situations, for example, in the event of divergences, breakdowns, etc.
What is a swing trader?
Basically, swing traders are those who are able to follow market price fluctuations in such a way that makes trading pretty lucrative. Like we`ve already mentioned, positions are placed for a few hours or days. It simplifies the whole process from the perspective of an emotional toll that makes you less nervous than with scalping and intraday trading. They can also combine fundamental and technical analysis methods to identify market entry and exit points. Usually, swing traders prefer classic currency pairs, and swap must be positive when positions are rolled over to the next day.
The growing number of swing trading adherents is explained by the advantages that characterize this style of trading. Let us consider the principal ones.
Entering the market in one direction with big players allows maximizing profits and minimizing losses
It is no secret that the price is driven by market participants with large capitals, not a crowd of small speculators. That's why private traders, like small "slip-fish", should follow the "whales".
As we know from Charles Dow's postulates, prices follow the trends that are created on the higher time frames thanks to the positions of market "sharks" and "whales".
It is possible to track the direction of the movement of market participants with large capital, knowing the fundamental analysis. It is possible to understand in what direction the majority of participants in the currency market are standing, analyzing reports of CFTC commission, option levels, the direction of monetary policies of central banks.
You can find the entry point for opening a trade in this direction with the help of complex technical analysis, tracking the main trend, starting from the monthly time frame, continuing with weekly and daily.
In this case, the main rule for a swing trader will be the good old "trend is your friend", an entry in the direction of the prevailing trend. It will be relevant to apply a trend and price channel trading strategies.
Swing trading allows you to earn more spending less time
Market analysis on higher time frames and the term of the position, which is 2-5 days, allows you not to analyze the chart hourly and eliminates the need for constant presence at your computer.
As a rule, price movements on high time frames are quite inert, and the analysis made at the beginning of the week will be relevant until Friday.
This style of trading generates a small number of entry points, but the profit potential in them, depending on the volatility of the currency pair is about 100 points, and sometimes even higher. Also, long-term trends sometimes give trades with an advantageous risk/profit ratio exceeding 1:3.
As for time consumption, an hour or two per day is enough for market analysis, opening trade, or placing pending orders. At the same time, an entry protected by Stop Loss and Take Profit makes any position safe.
Ability to use different strategies
As mentioned above, swing trading characterizes the style of trading, while the choice of strategy is up to a trader. This means that it is possible to apply those methods of market analysis and finding entry points, which are closest and most understandable for you.
You can swing as in the trend channels, buying from the third point of the trend line in an uptrend and selling in a downtrend, and using indicators, such as a Moving Average with a large period as a floating trend line.
It is recommended to combine market analysis methods on high time frames. It is mandatory to understand the direction of large players to understand technical analysis. And Price Action patterns, candlestick patterns on the higher time frames, and technical analysis figures help you to track entry points in the same direction as big money.
The peculiarities of the large player's position set are that he can't enter the market with all the volume at once, that's why he gains it step by step, which results in the formation of trades on the chart.
If two participants with large capital compete for the best entry prices, they can collect the stops of each other and the crowd, forming shadows of false breakdowns, which indicate a sharp and strong price movement.
Meanwhile, swing trading implies a special method of calculation of managements. Since the opening of trades takes place on high time frames, Stop Losses will be bigger.
Therefore, the volume of trade entry should be reduced. But the risk in the money per trade can be slightly increased, because the number of trades in swing trading is smaller, and the mathematical expectation is higher.
- Associated risks
This trading method doesn’t come without risks.
The first one associated with swing trading is the transfer of positions overnight. These risks inevitably arise if you wish to hold a position for several days. This means that your position may be affected by some unexpected news related to the asset itself or the market in general. You should try to mitigate this risk by choosing the right position size and closing the trade before important news or some data released.
Moreover, swing traders are subjected to the unpredictability of overnight risks that may result in significant price movements. Swing traders can check their positions periodically and take action when critical points are reached.
Even though there are lower trading costs compared to day trading, swing traders are charged swaps (or credited). In case the swap is negative and the trade is opened for a week, the accumulative amount may be huge (depending on the asset, of course).
- The best instruments
Needless to say, that with the wide range of assets present in the financial markets, there is always something to trade on. And swing trading is not an exception. Any instrument has its drawbacks and advantages, so the choice of an asset is totally up to a trader, depending on his risk tolerance, trading style, and the current situation on the market.
You can swing trade on any CFD asset. Among the most popular ones are:
Currencies. Here you have dozens of currency pairs to choose from, including:
Cryptocurrencies. These comparatively new virtual currencies all have their pros and cons. But cryptocurrencies keep bringing more and more investors and traders worldwide. Some of the most popular tokens include Ripple, Bitcoin, Ethereum, and Litecoin.
Stocks. One more choice for swing trading is to trade individual company’s` shares, e.g. Apple, Facebook, Amazon, etc. The point behind it is just like all the above-mentioned: swing traders buy a stock for a specific period of time, then sell it when the price goes up.
As you can see, learning what is swing trading and mastering that will help you to diversify your trading portfolio.
Which time frame is best?
Nobody will answer that question since there is no correct answer here. Usually, traders trade on H4 and D1, but there is no strict rule here as any trader uses the one suiting better. Some use weekly and daily, others are comfortable with H4, H1, and fifteen-minute charts. Test several options and combinations to see which one is working for you.
How to Start Trading
Have you made your mind to start trading and have no idea what to start with? You`ve got to the right place!
First off, open a live trading account.
Secondly, download a MetaTrader 4 trading terminal over here.
By the way, if you are new to Forex trading or just want to test your strategy, you can open a demo account and practice as long as needed.
Do not hesitate to contact us if any questions arise, we will be more than happy to assist you.
The availability of a safe and profitable trading strategy is a key factor for achieving success in financial markets without great risk to the trader's trading account. Developing a safe trading strategy for swing trading is easier than you think.
The swing approach to trading can be rightly considered one of the best. If you know how to swing safely, you will not have to worry about watching your positions all day.
Before we proceed to the strategies that can be used for successful swing trading, let`s have a look at some fundamentals of these strategies.
Technical analysis is a very popular component of any safe swing trading strategy. Paying attention to previously formed support and resistance levels, you can use technical analysis to determine the reasonable location of Stop Loss orders. Where is the safest place to place a Stop Loss in swing trades?
Most traders like to place stop orders several percent below the most obvious support levels. This method will allow you to save a position if the asset rolls back to the support level. But if your swing trade starts to move against you, the stop order will work, protecting you from large losses.
With a stop loss of 7-8% below the swing entry point (and 1-3% below the recent support level), you can rest assured that your strategy is safe enough. If you are disciplined enough to use small positions and follow your own Stop Loss rules, you will never lose all your money in one failed trade. That's obvious.
Fundamental security: An intelligent strategy for safe swing trading
When you are sure that the asset you select for swing trading has some fundamental safety in store, you can feel at ease. This fundamental approach to trading security can serve as a good basis for the idea you are putting into your strategy.
Strategy 1: Trend trading
With this strategy swing trading can be really profitable. Here we make money on the price movement in a trend. The positions are opened on a pullback.
This strategy does not work for all types of trends. We need a deep pullback because in this case we can enter the market with an optimal risk/profit ratio.
In trend markets, we use a Moving Average. As a guideline, we need a pullback to 50 MA. In a trend, the price never moves in a straight line but makes a pullback to its average value. This is where we will open our positions.
Here are the steps you should take:
Find a trend that is moving at 50 MA.
Open the trade when there is a rebound from 50 MA.
Place a Stop Loss of 1 ATR from the entry point.
The Moving Average with the period of 50 is one of the most common, that's why it is watched by many traders in the world, which eventually leads to a self-fulfilling prophecy. If 50 MA is at a support or resistance level, it makes it even more important.
In strong trend markets, use 20 MA. For normal markets, use 50 MA. If the trend is too weak, you can use 100 MA.
Strategy 2: Counter-trend trading
The counter-trend trading swing strategy has the following sequence of actions:
Determine the level of resistance near which the strong rebound of the price occurred.
When the price approaches this level again, we expect it to rebound.
Place a stop order.
Stop Loss is set at a distance of 1 ATR from the entry point.
Take Profit will be located at the nearest level.
Improving your strategies
The trading strategy is a complete guide for a trader. The purpose of the strategy is to ensure profit.
As a rule, a trading strategy is laid down:
rules of market analysis (fundamental and/or technical analysis) and search for favorable opportunities;
the rules of entering a position with a favorable forecast;
rules for holding a position;
rules of exit from the position;
Any trading strategy must be consistent with the personal qualities and discipline of the trader. How he analyzes the information coming from the market and assesses its nature, how he makes a forecast based on actual data. Whether it is inclined to hold profits and cut losses. A ready-made trading strategy is like a clear action plan that applies to both manual and automated trading.
Once you have developed your strategy, you might get to the point when you think of improving your trading performance. To do this, it’s essential to have a regular look at your strategies and see if there is anything you can do to make them work better. Enhancing your method will go a long way and might turn a nice ~2% per month into much nicer results.
The whole point of improving your Forex trading strategy is to make better returns.
So, here are a few tips on how to achieve that:
- Do nothing
Please, don`t get confused, we do mean it. The logic behind it is clear - a lot of traders ruined their accounts looking for enhancement and, in most cases, we must not try to fix something that is already working perfectly. So, if you are making 5%-10% monthly and you are okay with that, leave it like it is.
- Take care of Money Management
No matter how perfect your strategy is and what assets you are trading, you will get broke if you do not apply money management rules (we will have a closer look at them a bit later in this article).
- Back Test
Back testing will help you a lot to enhance your Forex trading strategy. It will keep you alert to the rules. If you’re trading D1 and rarely have any entries, do some back testing on H1. Back testing mindfully will also give you a hundred of ideas on how to improve your Forex strategy. After seeing hours, days, months, and years of candles you’ll learn things without even knowing it.
Managing risk in Forex
It is a crucial task for any trader to control risks. This is the only thing he is capable of. The market behavior is hard to foresee, but we can predict the range in which this "predictability" will be realized.
Risk management has three components: money management, trade, and emotion management. To implement all this, follow such recommendations:
Follow the main rule of money management, the essence of which is simple - do not risk more than 2% from each position. This figure can vary depending on the degree of aggressiveness of your strategy, but the smaller it is, the safer it is.
The ratio of possible profit to risk. The optimal ratio of risk to potential return is 1:3. If the trade does not correspond to it, it is dangerous to enter the market. It is very easy to manage it - by placing stop orders. Take Profit is set to the level corresponding to three Stop Losses. Compliance with this rule itself can guarantee 30-40% of profitable trades. Naturally, the greater this ratio, the better for the trader.
Be a bit of a robot. That is, follow the trading plan. If the trading system does not provide this entry or exit point, then do nothing.
Keep a trader's diary. This helps to manage emotions in the future. All positions placed should be recorded. It does not matter where: on paper, on the phone or the computer. This is the best tool for self-analysis; therefore, the approach should be appropriate. Every trade you make, think about why you entered the market here. Then correct the errors you have found.
Make sure you set the Stop Loss. You cannot always monitor the market situation, and emotions can lead to the fact that you will not leave the market in time, motivating your action with the eternal "I`ll wait longer to get more out of it". As a result, you will lose even more.
Do not trade the amount more than you are ready to lose. Any type of trading involves risks, so it is always possible to fully withdraw the deposit, no matter what level of skill you have. If you trade only for the amount, which is "not a drama to lose", then you are free from the risks associated with psychology. You will not be afraid, and therefore, will think more adequately.
There are two types of capital management: right and wrong. In the first case, we assess the ratio of risks and profit. If the approach is wrong, only one of these indicators is taken into account.
Well, most of the rules of money management were given above. What we can add is be sure to trade with a small amount of money, as there should be a reserve that can serve as an airbag.
It is also important to diversify the funds. The total share of invested funds in one market should not exceed 10-15%. The principle of diversification is consistent with the folk wisdom of "do not put all your eggs in one basket".
Top tips for Forex swing trading
Think of your swing trade strategy from the very beginning. We have mentioned a couple of swing trading strategies and there is much more. They can vary from cross overs to pullbacks, to breakouts and market profiles. Try them, test them, and create a strategy with rules and guidelines that are essential for money management, trade management, and exit strategies.
Pick an entry point as per your swing trading strategy. To do that, you have to monitor and decide which phase the market is in. Assessing the stage is how you can determine when to enter. Basing on your strategy, you can join throughout the first phase and enjoy the ride up during phase two. At any time during this phase, you can close the position and make a profit. Or you could wait until the market has already reached some point in phase two and still enter successfully.
Take care of your investment all along the way. Despite the time when you enter the market, protect your capital from unforeseen plunges. Make sure to set protective stops first.
Make use of the 4-hour chart. Most traders consider it as the best chart for swing trading.
Choosing a Broker
To start trading and make this experience comfortable and secure, you have to choose the broker super cautiously
Here are some tips for choosing a broker:
When picking a broker, an apparent problem is pricing. With cut-throat competition among the best brokers around the globe, most traders have now access to ultra-tight trading costs, starting from 0.4 pips.
Forex markets are volatile and choosing a broker with high-speed execution and smallest slippage is critical to the success (or failure) of whatever strategy you have chosen. Slippage refers to the difference between the predicted price when a position is opened and the current price the trade is executed at. To decrease the chance of recurrent slippage, traders should pick brokers with fast execution.
Contacting your broker should be quick and easy. As well as contact methods, it is important to note the hours of operation. Mostly, the support team can be reached through email, phone, live chat, and Skype.
Get referrals. It is always prudent to work with someone whom you have heard good things about. Ask around and find out which brokers other people trade with and why they chose a particular company.
Find out in advance all additional fees and commissions you will be expected to pay so there will be no surprises.
Last but not least is the broker`s reputation. Check how long has the company been in business and better avoid the ones opened a year ago.
Based on all of the above, we can conclude that this trading style is not the best option for everyone. And yet, for those who can understand what is swing trading, its specifics, and analyze the market, ready for the cost of effort and time to improve their knowledge and skills, as well as those who have intuition in the field of finance, this style of trading, can bring significant profits and success in one or another market.