Swing Trading

 

Swing trading is a trading approach whose goal is to take a mid-term movement within a period of a few days to several weeks. Swing traders as well as in day trading primarily use technical analysis. But it is a regular practice not to hesitate to apply fundamental analysis also in addition to analyzing price patterns and trends.

Many swing traders place trades on a so-called risk/reward basis. By analyzing the chart of an instrument the entry is determined, as well as the stop loss and afterward, it is anticipated where the take-profit could be located. Usually, traders tend to follow 1:3 R:R rule which means that if the risk is $1 then the trade should produce at least a $3 gain. Everything lower than that like risking $1 to make $1 isn’t quite favorable.

Benefits of Swing Trading

Before someone wants to start swing trading, it is important to know all the advantages that it may give. There are a number of features in swing trading, that have to be pointed out.

Longer Trends

Swing trading allows taking advantage of longer trending periods while scalping or day trading styles gain income on short-term volatility. It is considered that it is easier to predict longer-term movements rather than short oned, whereas shorter periods of trading may be affected by noise and false signals.

Time

When scalping or day trading, it is required to sit in front of the monitor all day long. On the contrary, swing trading requires to make some analysis once a day or even more rarely. It may be more useful for beginners also because a more user-friendly time frame is applied. In comparison to more high-frequency trading, swing trading gives more time for the collection of all the pros and cons of a trade instead of spending more time making trades during a day.

Low Costs

Everyone knows that trading commissions and spreads on assets affect the profitability of every trading system. Those who trade during the day, especially scalpers, may give away up to 30% or even 40% of their profits in a form of commissions. Big commissions amount being a reason for a large number of trades may be a factor that turns a profitable strategy into a losing one. For swing traders, the spread and commission matter less because they make fewer trades. Formally, a lower number of trades and less frequency give a swing trader an additional feature in comparison to other trading styles.

Higher probability of Indicators

The swing trading time frames start from 4 Hour charts and may be also daily and weekly. Every trader knows that a higher timeframe gives a higher chance of being correct in prediction. It refers both to candlestick patterns and indicators that may be used for trading. For example, if a zone is created in the Supply and Demand indicator on the Daily timeframe, then it is valued more than the zone on 5-minute chart. Finally, analysis of higher time frames is more accurate, so swing trading strategies can benefit from this.

Unfavorable points

Each trading approach has its pros and cons so there are some aspects of swing trading that can not be eliminated and every swing trader has to accept them.

  • Swap fees: Swap is a daily interest rate that is charged on positions that are held overnight. It is not an issue for scalpers or day traders, that open and close positions within a day, though may add up fees for longer-term trades, especially on some exotic pairs with high interest rates.
  • Overnight risk: The main gain of swing trading may turn into a negative part because if held overnight or over the weekend, there is no way to influence some events (political elections, disasters, etc).

Every trader should carefully accept these risks and try to lessen their influence on a trading strategy.

Swing Trading Strategies

Regardless of the trading style, every trader has to have the trading strategy to trade accordingly. There may be used different approaches in swing trading and here are some most popular ones that may be used.

1. Moving Average

According to the trading, principle Keep It Simple Stupid (KISS) there exists a Moving Average strategy that may be taken into account. It’s a known fact that Moving Average is not suitable for low timeframes because there is a lot of noise that produces false signals. Though on higher timeframes it is fine to use and you may have even heard about 50-period and 200-period Moving Averages that are widely used by investors.

Here is an example of the Moving Average strategy applied to the S&P500 instrument. It is a known fact that indices most of the time grow that is why a stock index (that could be used in a form of CFD as well. You can get a list of brokers that have CFD indices in our brokers list) has been used for a strategy to buy pullbacks to the 100-period MA. You see how nicely the price bounces up from the blue Moving Average. So it is definitely a nice approach to apply.

swing trading

2. Candlestick patterns

There is no need to explain the popularity of candlestick patterns because of their ease of use and simplicity. For swing trading, it is also a suitable strategy that may be applied because on higher timeframes the candle patterns gain higher power.

Below there is an example of patterns applied to the USDCAD H4 chart. You can see that the probability is decent enough to rely on the signals. Starting from the very first signal on the chart (3 soldiers and engulfing candle) it worked out nicely, being even a turnover point to change downtrend to an uptrend.

All the next similar patterns gave an ability to gain some profit and could lead to good trades with suitable Risk: Reward ratio and not that long time being in the trades.

 

price action

3. Swap zones

There is a strategy used with the help of the Swap Zones indicator that represents the broken areas of Supply and Demand. Usually, a strong zone breakout means that the stops that have been placed beyond the zone have been triggered. Also, it alerts that price is highly likely to visit another strong zone next to the broken one.

A break of a zone may be in line with the change of the trend like it occurred on the GBPUSD chart below. A green Demand zone has been broken by price and formed a swap zone. After revisiting of this zone, marked in the blue rectangle, price continued its movement downwards.

swing trading

4. Divergence

Divergence is a strategy when the price and some indicators are showing the opposite signals. Choosing an indicator is up to a trader and it usually should be some indicator that a trader has experience with. The most popular indicators are RSI, MACD, Stochastic, and CCI.

Divergence in an uptrend is when the price makes a higher high and the chosen indicator does not. In a downtrend, on the contrary, divergence is when price makes a lower low and the indicator does not.

On the AUDUSD chart below with MACD indicator, there are marked divergences with the blue lines. After the divergence occurred, it signaled as a reversal sign.

divergence

Tips for Swing Trading

Having a strategy is not enough to succeed in swing trading so here are some top tips that may help to make swing trading profitable.

  1. Follow the trend. Swing trading timeframes are powerful in terms of probability but there are still higher timeframes that may be highlighting the opposite direction. It is always better to place trades with the long-term trend of higher timeframes. Swing trading is much easier and profitable when trading is made with the trend, rather than against it.
  2. Use small leverage. Though nowadays it is very easy to find forex brokers that offer leverage up to 1:500, no one should fall into that trap. Leverage increases not only potential winners, but potential losses also. Strict risk-management should be followed either manually or with the help of automated Risk Manager software.
  3. Don’t stick to a single pair. As famous investor Ray Dalio called diversification (selection of multiple assets added to the trader’s portfolio) a ‘holy grail of investing’. The ultimate goal of diversification is to create a portfolio that consists of various assets that move independently to hedge risk.
  4. Count swaps. As mentioned earlier, swaps affect trades that are held overnight. It may lead to extra costs that a trader will pay for holding a position. Don’t lose the focus and monitor the swaps for opened positions and take into consideration that potential profits should cover the swap charges. In other case, the trade should be skipped.
  5. Stick to the strategy. Every trader faces a series of losses that may happen. In this case, a trader should keep calm and not start searching for a new strategy, thinking, that the previous one has stopped working. If you have checked the probability of the existing strategy on history and the current series of losses does not exceed the tested one, then there is nothing to worry about and everything will get back to normal.

Swing trading overview

Swing trading is a style suitable for all the markets and offers frequent trading opportunities.

One of the main benefits of swing trading is the lower amount of time that is needed to use this style of trading. It even may allow you to combine it with some regular job. Moreover, even if a trader prefers day trading or scalping, then a swing trading strategy may add some diversification and offer potential additional profits if traded properly!

It requires less knowledge to successfully trade in comparison to trading styles that are used on a lower timeframe and also is less stressful due to the increased amount of time that is given to make a decision before placing a trade.

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