Have you ever surfed or watched surfers paddling to a wave at the right swell? They ride it till it reaches the crest and dismount gracefully just before it crashes. 

That is exactly what swing trading is all about. Timing your entry right, enjoying the breeze on your face while the trend reaches its apex, and exiting before it reverses.

The key here is to master the art of identifying a trend and timing your entry and exit. Wondering how? Let’s dive right in.

Contents

• What is swing trading?

• Swing vs. day trading and intra-day trading

• Making swing trading work for you

• Swing trading strategies

• The bottom line

What is swing trading?

Swing trading is the technique of taking advantage of short and medium-term price swings in the financial markets. Traders may hold their positions for a few days up to a few weeks.

The gains or losses in are swing trading higher than those usually seen in day trading but lower than those in trend trading or investing. The best part is that they are evident and span for long enough to give you much-needed time to analyse the markets and plan your next move.

“Try to buy pullbacks or play shorter-term continuation chart patterns,” says Oliver Kell, who recorded an annualised return of 941.10% with swing trading in the 2020 United States Investing Championship."

Pros and cons of swing trading

The advantage of the swing trading strategy is that it allows for greater diversification, since multiple positions can be held for varying timeframes. This creates opportunities for greater profits but also greater losses in the absence of proper analysis, while keeping traders free of the stress of sitting in front of a screen for several hours a day.

However, the flip side of swing trading is that it entails rollover charges. For satisfying experiences, traders must adjust their position sizes and timeframes, considering the capital required to keep positions open.

Swing trading vs. day and intra-day trading

Making swing trading work for you

Swing trading requires some preparation, much like surfers prepare themselves and their surfboard before running into the ocean. 

You must understand the markets and specific instruments you want to trade by learning about their fundamentals. Simultaneously, polish your technical analysis skills to make effective entry, exit and risk management-related decisions.

Here’s how it goes.

Decide on the markets you want to trade

The first step to building an effective swing trading strategy is zeroing in on the instruments you want to trade. For instance, forex traders may use the 5-3-1 rule to pick currencies, the best trading indicators, and a suitable time for swing trading.

Learn what impacts the instruments

Deeply understand the factors that move your chosen markets. Factors like weather for the agricultural sector and geopolitical instability for gold trading, come under fundamental analysis. They drive market sentiment and, therefore, asset prices.

Practice identifying opportunities

Just like how a surfer knows which waves to ride, you need to sharpen your technical analysis skills to identify which price moves to take advantage of with the right entry and exit levels. Use a demo account to discover which indicators work best for your swing trading instrument and goals.

As a beginner, you may use copy trading to mirror the strategies and learn from experts. Do this only after ensuring that their trading plan, goals and style align with yours.

Make risk management a habit

Risk management is crucial to all trading strategies. Learn to calculate and asses the risk-reward ratio of every opportunity. Advanced trading tools can help you evaluate risk, profit potential, margin, etc., to make informed trading decisions. Another popular technique to mitigate risk is to effectively diversify your portfolio with multiple non-correlated and negatively correlated assets. You can also mix long and short trades to further cushion your positions against market reversals. 

Let’s backtrack to 2020, when the US announced its lockdown on Friday, March 13, 2020. The Nasdaq Composite Index plunged 12.32% on Monday. Preparing for shocks is paramount, especially when your positions are carried over to the next trading session. 

You can also sign up with FXTM for the latest market insights to stay updated on the latest news events that could trigger market reactions.

Stay resilient, but adaptive

Circle back to the surfer. Riding a wave through its ripples and chops makes surfing fun. But, a good surfer knows when the wave is turning dangerous and exits. 

You must stick to your trading strategy by building emotional resilience against short-term market volatility. However, identifying when a pullback is an indicator of a reversal is equally important. 

Optimal trading performance requires adapting to the markets as and when required. A careful study of the factors at play while your chosen market moves can reveal whether you need to exit or hold on to the position for longer. This will also require practice on a demo account.

Swing trading strategies

You can use one or more of the following popular swing trading strategies. 

Each one requires you to use specific trading indicators. Note that there is no single best swing trading indicator. Your trading plan and trading goals make a swing trading indicator suitable for your strategy.

Riding an ongoing trend

Also called trend-following, this swing trading strategy involves entering a trend that is already established. Fibonacci retracement is popularly used by swing traders to ride a trend.

You can use Fibonacci ratios, ±38.2%, ±50% and ±61.8%, to define price retracement (short positions) or pullback levels (long positions) in an ongoing trend. These are the effective entry points. Larger percentages (beyond ±100%), are used as stop-loss or take-profit limits. Watch out for trend reversals and carefully observe fundamental signs to exit timely.

Swing traders often use candlestick chart patterns to make trading decisions. These include trend continuation patterns, such as bullish and bearish pennants and diamonds.

Hopping on a trend at reversal

Experienced traders say the earlier you enter a trend, the better. This is where trend reversal indicators help in making informed trading seasons. The key is to enter at a reversal and exit just before the next.

MACD (moving averages convergence and divergence) is a popular reversal indicator. It relies on identifying crossovers of a short-term and long-term EMA (exponential moving average) to signal potential reversals. MACD is often combined with RSI (relative strength index) to determine overbought and oversold conditions. This helps traders confirm reversal signals.

Candlestick chart patterns, such as head and shoulders and double tops and bottoms, are popular trend-reversal chart patterns.

Breakout trading

Trading breakouts is one of the most popular swing trading strategies. It is used to take a position when the price breaks out of a trading range. The strategy involves sighting breakouts in sideways markets and embarking on a trend at the earliest opportunity.

On-balance volume and accumulation/distribution are useful for identifying breakouts. The price typically hits one of the key levels, resistance or support, with tremendous volume. Indicators, such as RSI and Fibonacci, can be used to identify potential breakout points. When the prices break above the resistance or blow the support level with high volume, a new trend sets in.

Rectangle chart patterns are used to indicate a breakout.

The bottom line

Swing trading is a favourite strategy among beginners. 

You can experiment with varying timeframes and market conditions while you build your swing trading strategy. It has significant potential and gives sufficient feedback to refine your trading plan. The key is to identify the instruments, timeframes and indicators that align with your trading psyche and goals.

To learn more about building effective strategies and receive free trading education, sign up with FXTM today.