What is the Swing Trading Strategy?
The Swing Trading Strategy is a trading technique that involves setting up a trade and leaving it running for over a period of few days to weeks or even months. This is in a bid to gain profits from price swings that occur over such periods. Technical and fundamental analysis are at the center of the swing trading strategy as they are used to identify trading opportunities.
The swing trading strategy is all about establishing where the price may move next, then entering a position in that direction to gain profits if the move occurs as predicted.
A swing trader will spot a possible trend and set up a trade and then exercise patience for a few days or weeks for the opportunity to materialize.
As already mentioned above, this kind of strategy involves leaving trade running longer.
This makes the swing trading strategy suitable for those traders who are busy almost every other time but can find time to carry out a thorough analysis then set up a trade.
What should you do to achieve success with the swing trading strategy?
Carry out a thorough technical and fundamental analysis to determine where the price of a certain asset will most likely be in the near future.
After establishing that, you can then determine an appropriate entry point and apply risk to reward ratio knowledge to set your Stop Loss and Take Profit orders.
As a swing trader, you need to analyze the risk to reward ratio as you place trades.
Determine where to enter the trade, where to place your Stop Loss and where to Take Profit. In doing all this, let the Stop Loss and Take Profit to portray some good risk to reward ratio.
For example, if your Stop Loss risk is $200, then let your Take Profit be at a reasonable level where you can earn something like $600 or so. Risking $200 to gain the same or even less is unreasonable.
Risk management is also key to apply as you set your Stop Loss order so that you do not expose a huge part of your capital. Remember this trade will run for days without being monitored.
The fact that the trade will run for days or so also gives you the opportunity to set larger targets than in day trading.
This is because the price will have much time to move about and is not limited. Therefore set large Take profit targets which are reasonable of course – too high Take Profit orders may never be activated.
Concerning where to enter the market,
Swing trading needs one to enter only when there seems to be a high chance of winning. It is highly probable that you will win a Buy if you enter at a swing low. Conversely, entering at a swing high gives higher chances of winning a Sell position.
Patience is key in swing trading. Just after you have placed that trade in a particular direction, it may begin going against you as you watch. Keep calm and trust your analysis without rushing to close the trade. Do not react emotionally but exercise patience and leave the trade to run.
Swing trades will be exposed to the risk of trading gaps that occur overnight and during the weekends. These may contribute to an earlier activation of your Stop Loss order exiting the trade, gaining nothing from such a trade.
Using the Swing Trading Strategy to Trade Forex.
We mentioned technical analysis as being one of the central disciplines of swing trading. Let us see how you can apply it to set up trades that will be left to run for several days or weeks, yielding huge gains.
Several trading strategies are applied to sum into this one Swing Trading Strategy. These include but not limited to the following three which we shall discuss here;
- Breakouts Trading.
- Trading Retracements.
- Trading Trend Reversals.
These three will truly ensure you trade the Swing Trading Strategy like a pro. Let us dive into the details of each and see how.
1. Trading Breakouts.
In order to trade this kind of technique, you need to have major established Support and Resistance areas. You know how long you want your trade to run, which may be several days to weeks.
Apply the right time frames, both lower and higher, and determine major support and resistance levels.
Once these very important levels have been determined, then what remains is waiting for any of them to be broken. The price may move upwards breaking the Resistance area resulting in a breakout.
The same price may also move downwards breaking the Support area resulting in a breakdown.
Ensure that the breakouts are confirmed to be real by allowing successful re-tests of the broken levels. Let me explain how re-testing happens.
If the price broke the Resistance level upwards, it is not enough to enter a Buy position immediately. Allow the price to fall back again to the same level several without breaking the level downwards. That way, you will be sure that a new support level which was previously resistance level, has been created and that the price will keep rising.
The same applies when the price broke the Support downwards. Do not rush to enter a Sell position but allow the price to rise back to the same level and fail to break it upwards. That will have created a new true Resistance level which was previously a support level, as the price keeps on falling.
How do you trade a breakout upwards after a successful re-testing of the new support level?
By entering a Buy position of course. The vice versa is true for a breakdown followed by a successful re-testing of the new resistance level – You Sell.
Concerning your Stop Loss and Take Profit orders, we already sealed a deal. The application of reasonable risk to reward ratio and risk management cannot be overemphasized here.
2. Trading Retracements.
Retracements are also called pullbacks. They are temporary reverses between a major trend before the same primary trend resumes shortly after.
Now tell me, how do you tell a price reversal from a brief pullback unless it has already occurred and you can see it? It is sometimes difficult to tell.
However, that interface is full of technical indicators you can use to rule out a real reverse from false reversals. Your moving averages and momentum indicators can help. Price momentum will not seem to change significantly for a retracement while it will tend to decrease or increase markedly in case of a reversal.
On a primary uptrend, brief reversals will occur downwards then the primary uptrend will resume after several candlesticks. On a primary downtrend, on the other hand, brief reversals will occur upwards and then the primary downtrend will resume after a couple of candlesticks.
With this knowledge and knowing how long you want your swing trade to take, you can use your chart under different time frames to spot pullbacks.
Once a pullback has been spotted, then you know that such is just a simple pause of the bigger trend and that it will resume shortly. You can then place a trade immediately the pullback is over.
By immediately I mean after you have been sure that it was a pullback.
To confirm that the trend will still resume, wait for the pullback to end. The last candlestick of the pullback must be followed by an opposing candlestick. This opposing candlestick must end above the high of the last candlestick of the retracement if an uptrend is resuming and below the low of the last candlestick of the retracement if a downtrend is resuming.
If an uptrend resumes after a downward retracement, then enter a Buy position. If on the other hand, a downtrend resumes after an upward retracement, enter a Sell position.
Handle your Stop Loss and Take Profit with proper risk to reward ration and risk management awareness and understanding as we discussed.
3. Trading Trend Reversals.
A trend reversal is a complete turn-around of an uptrend to a downtrend and a downtrend to an uptrend. In the previous strategy, we handled retracements which we said may be difficult to tell from reversals until they are complete.
We said however that momentum indicators can help to tell a retracement from a reversal. Price momentum will not seem to change significantly for a retracement while it will tend to decrease or increase markedly in case of a reversal.
When an uptrend loses the upward momentum, then the price will start moving downwards. Conversely, if a downward trend loses the downward momentum the price will start moving upwards.
With the knowledge of how long you want your swing trade to take, switch to different time frames, and identify possible reversal points. This can be by use of momentum, overbought and oversold conditions, or even support and resistance zones. Once your analysis has settled for an imminent reversal, you can wait until it begins for confirmation before entering the position.
How do you trade a downward price reversal of after uptrend?
By entering a Sell position of course. An upward price reversal after a downtrend is traded by entering a Buy position.
Do I need to repeat anything about Stop Loss and Take Profit orders? Exercise proper risk management together with risk to reward ratio consciousness.
Wrapping Up on the Swing Trading Strategy.
In a world where so many strategies can sum into the Swing trading strategy, only three stood out. Blended well with your fundamental analysis and other technical indicators for confirmation, they will truly help you Swing trade like a pro. Apply them in your swing trading today and enjoy the profits.