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Swing Trading: Is It the Ultimate Trade Method? How To Develop Swing Trading Strategies?

Author
|Updated June 29, 2022 03:27
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Do you want to establish a higher profit objective while keeping your losses within a narrower range? Do you want to hold a trading position for a long period without constantly checking the price chart? If so, you should try swing trading.

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Swing trading uses a manageable time range that is best for newbies. The majority of financial markets, including forex, stocks, and cryptocurrencies, are suited for swing trading. However, is swing trading suitable for you? Should you start with day trading or swing trading? We will tell you tell you the answer and help you develop swing trading strategy.


What is Swing Trading?

As the name suggests, swing trading involves taking advantage of price swings in the market to make profits. Investors use technical analysis to catch short-term to medium-term trading opportunities over several days or weeks. Sometimes it can extend for a couple of months. Think of swing trades as a middle ground between day and long-term traders. 

How does swing trading work?

The swing consists of swing points and a swing body. The swinging body offers a lucrative trading opportunity. On the other hand, the swing points are essential, but trying to catch the points sometime can lead to significant losses. You might want to wait for price action to post a reversal signal. 

The idea is to catch massive price movement in the direction of the market trend and wait for the next opportunity. 

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It's common for people to confuse swing trading with day trading  But the two are different day and night. Essentially, day traders close the position within the same day, while swing traders hold the trade at least for a fortnight.


Swing Trading vs. Day Trading vs. Position Trading

Swing Trading vs. Day Trading 

Day trading involves opening and closing trades on the day. The main difference with swing trading is the duration of holding trade. Swing trades wait relatively long for opportunities to appear, taking several days or weeks to close the position. Typically, you should hold the trade more than overnight. 

Moreover, day trading requires a great deal of experience, knowledge, and the ability to stomach bigger risks. It is, therefore, more challenging. Therefore beginner traders will want to go with swing trading.

Swing Trading vs. Position Trading

A position trading strategy favors people investing for retirement. It, therefore, requires patience and a great deal of trust in a specific instrument. Profits of swing trading can add up quickly, and you have a chance to compound the interest. You can therefore make it a source of primary or passive income. 

You should make it shorter and concise, and use a comparison chart to show the differences.

Strategy

Day trade

Swing trade 

Position trade

Trade way

Trading

Trading

Buy and hold

Time 

One day

Weeks

Years

Trading Method

speculation

speculation

investment

When to buy

When signals are established

price at support level

/

When to sell 

When signals are established

price at resistance level

/

Potential profits

High 

Middle

High

Risks 

High 

Small

Middle

Representative

Livermore

Soros

Buffett


Why People Love Swing Trading

Swing trading is a compromise between day trading and long-term trading. If you want more flexibility when trading but don't want to keep your investment for a substantially long time, you will want to go with swing trading. 

It is a balance between the world of day trading and swing trading. You don't have to stay in front of the screen the whole day, as with day trading, which can lead to overtrading. Nevertheless, you can open multiple traders over a period and compound the profits, unlike long-term trading.

1. Consistent monthly returns 

2. Allows you to compound profits

3. Uses relatively tight stop loss hence less risky

4. Numerous trading opportunities in a volatile market hence more profitable

5. More connected on the market and hence updated with news events

6. The trade can transform into long-term investment


Here Is The Process of Developing Swing Trading Strategy

Swing traders have special strategies that give them an edge over the market. Typically, you will want to look at multi-day candlestick and chart patterns like flags, moving average crossovers, and head and shoulder formation. The whole idea is to find a pattern that offers predictable market movement. 

As mentioned, each trader has their own strategies that offer high opportunities. Typically, here is a general process of how to go about it. 

Step1. Start Analysis With a Daily Time Frame 

Higher time frames tend to be more reliable. As a swing trader, check the price action on a daily time frame. Specifically, you might want to set the price action to use the New York close. Once you're confident with the daily chart, you can scale it down to a four-hour time frame. 

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Step2. Identify and Draw Resistance and Support Levels

This is a crucial part of the swing trading process and significantly determines the results.

Essentially there are several ways of drawing support and resistance levels. You can either use horizontal lines, trendlines, or moving averages. 

Horizontal support and resistance levels are the most common and offer great target areas. Trendline works excellent in a trending market, albeit unpopular to swing traders. But they can help you identify places the price is likely to reverse.

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Step3. Evaluate Market Momentum 

Once you draw the resistance and support levels, the next step is to evaluate the momentum. Simply, during an uptrend, you will want to ensure the price action is forming higher highs and higher lows. Similarly, the market is trending downwards if there are discernible lower highs and lower lows. 

You want to enter long positions during an uptrend and short positions during a downtrend. But we also have ranging markets where prices are neither rising nor plummeting.

During the sideways momentum, the price moves up and down and offers the best trade for swing trades. The resistance support level in the ranging market easily stands out from the surrounding price action.

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Step4. Identify the Trading Signal on the Price Action

At this stage, you have identified the areas of interest and the market momentums. Now, it is time to look for buy signals at the support level and sell signals at the resistance zone. This much depends on our trading strategy. 

Scan the market for chart patterns and candlestick patterns. But don't look for setups. It sounds like it's the same thing. But believe me, it is not. 

Scanning the price action for setups involves looking for clear setups, pretty much a qualitative process. If no setup is visible, you wait for another opportunity. Searching for setups is forceful and expecting that you must find a particular setup.

Step5. Set the Exit Point 

Now the next step is setting the stop lossand profit target. Remember, the idea is to catch a substantial amount of the swing, not the whole price movement. 

The support and resistance zone will help you set the stop loss, which will help you calculate the risk and reward ratio. The goal is to exit with profit at the profit target. However, you can always close the trade automatically at the stop loss if the trade goes south.

Step6. Risk Management 

The resistance and support zone will help you determine whether the trade offers favorable risks to reward ratio to open the trade. 

Remember, you are trying to catch the pips between the swing low and swing high. Ideally, you will want to place the stop loss about 20 pips below or above the candle you are trading. 

The risk should offer a great return of at least twice the potential loss. The standard reward-to-risk ratio is 3:1 or 3R - multiples. Therefore the risk of $50 should offer a return potential of $150. Otherwise, you will want to stay out.


3 Popular Swing Trading Strategies

Now you need a trading strategy before opening a trade. Swing trading has several approaches you can use to find profitable opportunities. But one common denominator is that we want to catch one move and a strong trend before reversal.  

We will explore 3 top strategies.

1. Stuck in Box 

This strategy involves price action between horizontal support and resistance levels. The market ranges between the levels confining the market in a box-like structure. This means the market is trending sideways. Then wait for the price to break the support or resistance area and experience a strong rejection. 

To give you a clear picture, the price closes above the support or below the resistance level. For example, if the price is in a support area, open a buy position on the next candle. Place the stop loss below the support level and take profit well before the resistance level. The idea is to exit the trade before the selling pressure enters the market. 

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AUD/USD on a daily time frame 

The blue line coincides with the previous resistance level. The price pierces through the resistance line but closes below, giving a short signal. The price then dips significantly, a good short position for traders.

2. Riding the Wave 

This strategy involves waiting for pullbacks and entering the market when the trend is about to resume. It works best for big pullbacks where you can make substantial profits. 

In this strategy, you will want to incorporate a moving average. You might want to use a 50 MA or which works for you best. Now, wait for price rejection around the moving average. If it is a bearish rejection, go short on the next candle. Set the stop loss above the MA and set the take profits some pips at the next swing low. 

3. Fade the Move 

Fade the move means going against the momentum. This works best for traders who like hoping against the crowd. Sometimes you could be right!

Simply wait for a strong momentum to move into a support or resistance zone. A strong rejection should follow, characterized by a candlestick that forms a strong bullish close at the support level or a bearish close for the resistance zone. After the bearish close, go short on the next candle and set the profit target before the next swing low.


Is Swing Swing Trading for You?

Arguably, swing trading is more profitable than day trading. But that doesn’t mean swing trading will work for everyone. Some traders make profits day trading, including scalping. 

A profitable trading style depends on your trading style and personality. You will struggle if the style doesn't match your personality. But how do you know if swing trading is for you? 

Below are some pointers to help you. 

● You Prefer Few Trades to Make More 

Swing trading works on a higher time frame. This means the opportunities appear several times, typically less than ten every month. Therefore, you will open a few positions every month. But for every trade, you make higher returns. 

You Can Hold Trades for Several Days

Swing trading is not your thing if you prefer seeing profits every day. With swing trading, you can hold a trade for days or even weeks. You, therefore, don’t mind holding trades over the weekend and overnight. But there are few exemptions where you can incorporate risk management to close the trade before the weekend when there is likely a news event that could cause high volatility. 

● You are Usually Busy at Work or at School 

The work schedule might leave you little time to analyze the market. If you don't have time to watch every tick, you should consider swing trading. It allows you to juggle between work and school with swing trading.

● Slow-Paced Trading Is What You Prefer

If you want to trade without anxiety, swing trading might be for you. With swing trading, you can take more time to analyze trades and make decisions. You will therefore be relaxed and make better trading decisions.

● You Want Time Freedom

Swing trading gives you the freedom to do other things. You only spend time analyzing your trades for a few minutes. On other days, you just spend a few minutes managing and reviewing the trades.

Conversely, if you are looking for action-packed trading, you might want to consider scalping. Essentially, people who can't stand the idea of holding a trade overnight or during the weekend can't be swing traders. In addition, this is not for you if you want to know whether you are right or wrong.


Pros and Cons of Swing Trading

Let’s start with the advantages. 

 ✅ It Doesn't Demand Much Time Commitment

This means you can trade part-time. Swing trading usually uses a daily time frame; you only step down to a 4-hour time frame to find better entry points. You don't have to be glued to the screens all day watching what is happening on the charts or following the data posted every hour. It is less hectic and does not require constant action and attention.

 ✅ High-Profit Potential 

With proper risk management and adherence to the strategy, swing trading can rake in good returns. You must also prepare your mind mentally to stay consistent. And there is less room for making errors. 

 ✅ It Doesn't Tie Capital 

You don’t have to hold your capital for a long time in a position like it happens in long-term trading. You can exit with a manageable loss if the signal fails. You, therefore, have the flexibility to use your money to ensure it is making you more money.

But what are the downsides of swing trading? Let's look at the most notable.

Risk of Overnight and Weekend Gasp 

One of the biggest disadvantages of swing trading is the price gaps that occur over the weekend or during the night (after hours), especially when there is market news. The gaps can be so massive that they surpass the stop loss.

Possibility of Missing Massive Potential Profits

Swing trading is based on swings. This means you enter the trade at a swing low, exit at swing highs, and vice versa. A pullback is enough to make you exit the market. Therefore, you end up losing significant profits that come with long-term strategies.

Timing the Right Opportunity Can Be Challenging

Timing an idea to swing opportunities is sometimes challenging. It is even more difficult for newbies.  


FAQ


1. Is it profitable to swing trade? 

The straight answer is yes. Swing trading is profitable and can help you beat the market. But you must develop a good strategy and discipline to adhere to the strategy.

2. what are the best indicators for swing trading

Indicators in swing trading help determine the market trend. The top indicators for swing trading include relative strength index(RSI), Bollinger bands, volume, Stochastics, and MACD. 

3. Can you make a living out of swing trading?

You can make consistent returns from swing trading by adhering to the strategy of buying at a swing low and selling at a swing high. 

4. Swing trading and long-term investing, which is most profitable?

Swing trading is more profitable than long-term trading. While long-term traders make high profits in a single trade, swing traders can compound their relatively smaller profits. These profits can add up quickly to significantly huge profits. 

5. Is swing trading good for beginners?

Swing trading is perhaps the most suitable strategy for beginners. It is more flexible than long-term trading. Similarly, you don't have to spend the whole day in front of the screen like in day trading. 

6. Why does swing trading fail?

Swing trading might appear simple and straightforward. But it is not foolproof. You might end up with a loss. But majorly, the losses can be attributed to the failure to adhere to the general strategy. 


The content presented above, whether from a third party or not, is considered as general advice only.  This article should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. *CFD trading carries a high level of risk and is not suitable for all investors. Please read the PDS before choosing to start trading.


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