Forex Swing Trading Strategy.
What is swing trading and what strategies can be used?
Here is a guide to find entry points, stop losses and take profits.
The market never moves according to a linear trend, but constantly fluctuates. This trend occurs not only during the phases of uncertainty, but also during the most sustained and solid trends.
The Swing trading strategy aims precisely to profit from market fluctuations, entering when the corrections of a trend make a pullback and immediately afterwards the push of the trend starts again.
Basically when a strong trend makes a temporary deviation from its course, the trader straightens the antennas and then goes into action when there is a counter-deviation (a “swing”, as in the image below) that puts the price back on the march on the trend.
The greater the new momentum of the trend, the greater the gain that will be obtained from this strategy.
Technically, when it comes to swing trading it would be more correct to talk about trading style, rather than strategy. In any case, the essential element remains to grasp the temporary change of course of the market and then ride the new wave , making it for a period of time neither too short (because it would limit the gains), but not too long to risk a reversal.
Although there are those who also do it counter-trend (as we will see later), this strategy is typically trend following.
Swing Trading vs Day Trading / Position Trading
Given its characteristic features, Swing Trading is an intermediate methodology between short-term trading and position trading. In the first one, in fact, the aim is to obtain “hit and run” earnings within a single day, while in the second; the aim is to obtain big gains by riding a trend for very long periods.
Swing trading, on the other hand, is in the middle, since each investment goes from a couple of days up to a few weeks at the most (however, if 1H timeframes are used, certain swing trades can also close on the same day, but they are exceptions) .
Even more marked is the difference compared to scalping, where instead the operations last even just a few minutes.
This represents one of the great advantages of Swing trading, because its “rhythm” is ideal: there is not the excessive stress typical of short-term trading (or even worse than scalping), but not even the excessive slowness (sometimes boredom) which characterises position trading.
For this reason it can also be managed as a part-time activity, because it can be organised over a few hours of work per day.
Let’s make it clear: managing it in a few hours does not mean that you can trade well! It means that accurate analyses will always and always take place, but that these can be done without hurrying and in reasonable time frames.
Timeframe Swing Trading
Since the concepts of trend trading and trend corrections are at the basis of Swing Trading, one cannot think of applying this strategy at very low timeframes, where those concepts would definitely lose their effectiveness.
Usually the minimum recommended timeframe is 1H, but the majority prefer a 4H chart which is already wider. There are not many people who take advantage of the “daily” (wrong), probably because it involves too sparse and therefore similar to position trading.
However, except for too short timeframes, the Swing trading strategy can be adopted on all other time horizons.
The Best Environment For Swing Trading: Forex And Stocks
For this investment method, Forex is undoubtedly an ideal hunting ground. In fact it is a very volatile and extremely liquid market. The trend of currency pairs proceeds with continuous fluctuations, which generate many opportunities for swing traders.
However, this technique is very versatile and can be carried out effectively in all other markets, including the equity market.
Regardless of the type of market in which you operate, it is FUNDAMENTAL to carefully select the asset on which to operate.
Indeed, it is necessary to select only those situations in which – due to the dynamics that prices and the market are having – compared to the chances of success, the risk seems to be very low. In other words, this type of trader probes the markets very well in search of the best deals.
OPERATIONAL GUIDE: The Three Weapons Of The Swing Trader
When you decide to adopt a swing trading strategy, you have three “weapons” with which you define your inputs. Any trader before venturing into the market should be able to “handle” these three weapons with ease.
Here they are:
1) Technical analysis: it can help us identify the moment when a corrective movement can end, and therefore a trend can resume the race. The swing trader therefore tends to look for graphic patterns such as “head and shoulders”, “flags”, “wedges”, “triangles”. But reversal candlestick patterns such as hammers, falling stars, etc. are also exploited
Do you know what the PATTERN is and which are the most USED to trade?
2) Main macroeconomic issues. News such as rate decisions, macro reports, geopolitical situations, etc. can create market volatility and generate excellent swing trade opportunities, since the events that occur around us often help us evaluate sentiment on different financial markets.
We think, for example, of how much the burst of tension in the Middle East can have a sudden impact on the price of oil, perhaps changing an ongoing trend or dampening a correction.
3) Price analysis. Thanks to the analysis of the candles we can understand the recent history of the “battle between buyers and sellers”, and therefore check if a trend is running out or starting again.
OPERATIONAL GUIDE: Swing Trading Entry Signals, Stop Loss And Take Profit
Through the three weapons we have just seen, a trader who aims to take advantage of the “swings” should be able to identify the moment when the trend correction is about to end and the price ride will start again.
The concrete techniques that are used are very personal and change from trader to trader, since everyone has their own ideas of the market and operates on the basis of them.
However we can identify three “basic” ways to “catch” Swings.
1) Continuation figures
One of the ways to catch swings is to identify if there are “continuation figures” (flags, wedges, rectangles, triangles etc.). When the price correction occurs with the formation of these figures, then we have a good signal.
ENTRY LEVEL: The entry level is at the point where after the breakout the maximum / minimum of the continuation figure is broken.
STOP LOSS: The minimum / maximum point of the continuation figure is positioned at the level (or slightly below).
2) Test on the maximum and minimum levels
Another way to find market inputs in swing trading is by taking advantage of the minimums or maximums already tested several times by the market (the greater the number of times, the more reliable they are). These points are possible levels of price rebound or market turnaround.
This technique can be performed both on the basis of static supports / resistances and on dynamic levels.
ENTRY LEVEL: can come from…
1) The breaking of the “mini” trend-line that must be drawn on the retracement
2) The formation of a reversal candle pattern. One of the best known is for example Ross’s 123 , or the Three white soldiers , or even the Morning and Evening Star , etc. etc.
3) Signals of one of the trend reversal indicators, or from a moving average (such as EMA21). STOP LOSS:
Depending on how we identified the entry point, the stop loss will follow the corresponding exit rules. In any case, it should be positioned slightly above / below the maximum / minimum of the corrective movement of the trend.
STRENGTH OF THE PRICES AND INCLINATION OF THE TREND-LINE. Usually when the price movement towards the trend-line is sudden and strong, it is much more likely that it will withstand the impact.
If, however, it is “broken” by this sudden and strong movement, then it is more likely that the price march will later be vigorous.
It should also be remembered that the inclination of the trend-line is inversely related to its effectiveness. The less inclined trend lines have greater reliability than those that are too steep.
3) First pullback … after a breakout
Another favourable situation for triggering a swing trade occurs when 4 specific phases occur during a trend:
1) The price of an asset enters a congestion zone after a trend
2) It makes a breakout resuming the march in the direction of the trend
3) Then a new pullback occurs, with the prices in counter trend (return move)
4) Finally following this movement – a fortiori if this phase is accompanied by a reduction in the range (body of the candles) – often a swing is generated with the subsequent recovery of the trend.
ENTRY LEVEL: the entry level is at the level of the first breakout.
STOP LOSS: The pullback point is positioned at the level (or slightly below).
Swing Reliability
Not all swings are created equal. Their reliability must be assessed on the basis of several factors, which can make it more or less “safe” to trade.
1) The retracement% (seen through Fibonacci levels) should remain in the range between 38 and 62%. Beyond this level, in fact, the possibility that this is not a simple correction of the trend, but a real inversion, begins to be very concrete.
2) The strength of prices. If prices approach a support / resistance level quickly (i.e. with a few large-bodied candles) it is believed that the chances of rebounding on the support / resistance increase.
3) The impulse / correction ratio. The number of candles that make up the trend correction should never exceed the number of candles of the last impulse (i.e. of the last push received by the trend).
The size of the trade and the overnight risk
As we said, swing trading itself involves multi-day operations, that is, overnight positions are held open (unlike day trading where positions are closed before the market closes). This raises the danger of encountering a price gap / lap, or sudden jumps in prices. For this reason, “swing trades” are usually made with a lower position size than day trading.
Furthermore, strict discipline is required for the management of the positions, with appropriate stop-loss orders to protect the allocated capital.
ECN
Counter-Trend Swing Trading
Some swing traders also tend to trade swings against trends. Even if we don’t agree very much, technically nothing prevents us from doing it. However, a much more accurate analysis capacity and a multi-timeframe approach are required. In practice, a trader does not analyse a single time interval on the chart but makes his decisions based on the analysis of multiple intervals.
The logic is this: if on a daily chart we grasp the existence of an upward trend and therefore low swings could form, on a lower timeframe (type H1) there could instead be a short-term bearish movement where high swings could form. In this case, the trader knows that even if the long-term trend is upward, he can still make profits in the short or medium term by using the signals generated by the shorter time intervals.
Conclusions
Swing trading is a very widespread methodology among operators , because it allows you to keep your positions open for several days and therefore not worry about having to continuously check the position (if it remains within the stop). It also allows profits that are on average wider than in day trading and generally the operating rules provide for tight Stop Loss, so the risk of losses is usually reduced for each operation.
In the face of this, some care is required in planning your trades, and even greater frustration if things do not go as hoped. It is clear that reversals do not always take place and sometimes a retracement can continue for a long time, ending up causing us to take one or more stop losses that throw us out of the market making us lose money and … patience.