Swing Trading - What You Need to Know in 2022

It sometimes happens that, when opening a position within the day, the trader gets into an emerging trend and watches the gain accumulate as it develops. In this case, at the end of the day, there is a picture that gives a high potential for the continuation of the trend and indicates the advisability of moving the position through the night. Traditional short-term trading methods (scalping and intraday) require mandatory closing at the end of the trading session, which, on the one hand, minimizes the risk, but also reduces the potential return. However, there is a style of trading that combines both intraday and overnight trades - swing trading.

In this article, we will tell you what swing trading is, learn more about the pros and cons of swing trading, and what strategies you can apply.

What is Swing Trading?

Swing trading is a common tactic and is suitable for those who do not have time to be in front of the monitor during active trading hours and yet want to capitalize on sharp price movements in both directions (as opposed to long-term strategies).

Because swing trading is associated with carrying a position over to the next day, it may seem like an exit tactic rather than an entry tactic. Indeed, for some positions, intraday traders manage to find entry points that are so successful that they can be carried over to the next day, resulting in a risk/reward ratio of more than 1/10. But on average, a swing trader will work with wider Stop-Losses and not focus on fast movements. It will be absolutely normal for a trader to enter a position and stay in it for 2-3 days until the price movement finally materializes.

Psychologically, this is a more comfortable style for those who do not want to work with short Stops and high leverage. But there is a nuance: the number of trading opportunities for a swing trader is limited. For those who work in the foreign exchange market, for example, there is also the effect of instrument correlation. It can happen so that almost all instruments are locked in ranges for several weeks, and the best solution, in this case, is to be out of the market.

Therefore, swing traders often choose markets with a wide level of diversification, such as the American stock market. From the variety of instruments (there are several thousand) there you can always choose assets that are in a strong trend, ready to break out a large range, or located near strong support/resistance levels. If the S&P 500 or Russell2000 index rises, many issuers (stocks) can show good buy signals, including using conventional technical analysis.

How Does Swing Trading Work?

Swing traders often take a major chart trend, for example, an uptrend. How is the decision to place an order made? The rule of thumb here is to buy when the trend reverses (when a correction occurs) and secure gains the minute the main trend moves. It is important to close positions when there is a breakout of a line or support curve. Sometimes there is no bullish or bearish trend on the chart, it is called flat. But at that time, the chart is still moving along its usually predictable path inside a channel, where the price varies between resistance and support lines, which are parallel. If this channel is accurate and already formed, then traders can still start trading, reducing the number of positions because of the risks of an active trend change.

Thus, the lowest point before an uptrend is called support. In this situation, the trader can take a long position near the support area or wait until the trend reverses to close trades.

Swing traders often study long-term fundamental trends and can hold assets not for a few hours but also weeks or months, depending on how long the trend lasts. Market sentiment predefines how long a trend will last.

Advantages and Disadvantages of Swing Trading

Like everything else in the financial market, swing trading has both potential advantages when used wisely and disadvantages as a trading strategy.

The main advantages that can be associated with this popular trading methodology include:

Clear trading boundaries: the swing system determines when to enter a position, determines the most strategic Stop-Loss and the best Take-Profit level. The strategy ensures that losing trades are closed early enough, and potentially successful trades remain open for execution.

Natural market movement: one of the main reasons traders lose in forex trading is that they try to fight the market and its movement. Swing trading inherently uses the natural flow and fluctuation of the market to place advantageous trading positions. It's all about determining where the market has been, where it is currently, and the likelihood that it will revise a previously determined position, and then taking advantage of that.

Smaller Stop-Losses: except for intraday trading strategies, swing trading has the smallest Stop-Losses. That means that the risk associated with each open position is relatively low and, therefore, the investment is better protected. The ideal swing trading strategy also has a perfect risk/reward ratio of 1:3, each open position should yield three times the trading risk.

More trading opportunities: as a medium-term trading strategy, swing trading allows you to discover trading opportunities as they arise because you enter and exit a trade relatively quickly. Because of its cyclical movements, the strategy also allows you to trade with the trend as well as trade against the trend - hence, more trading opportunities.

As a swing trader, you should always keep the following disadvantages of swing trading in mind to minimize the potential losses associated with this trading methodology:

• High rate of triggered Stop-Losses: swing trading has a tiny Stop-Loss margin that is sometimes insufficient for market timing to roll back to get the momentum you need. This means that the probability of being hit by a Stop-Loss is high which may result in sufficient losses.
• Market unpredictability: swing trading is based on probabilities. Thus, the market does not always behave the way technical analysis suggests. Trades in swing trading are very sensitive to market reversals; the market behaves exactly the opposite of what you expect.
• Gaps: trading on the swings involves holding positions for several days. Sometimes markets can open with significant price gaps, and if the gap is against the position, it means instant losses.
• Is this method suitable for you personally? Everything here depends not only on your experience or the size of your trading capital but also on how painlessly you are ready to "part" with your funds because here we are talking about weeks or even months of holding an open position.

In addition, success here will largely be determined by the presence of such personal and psychological qualities like:

• Patience, the ability to wait;
• The ability to calmly wait out drawdowns;
• The ability to analyze the market.

The Best Instruments for Swing Trading

For technical swing strategies, instruments must be highly liquid. Otherwise, assets will not work out the intended schemes - either they will trigger the Stop-Loss by a gap, or they will simply stop moving, and when the swing trader decides to close the position - there will not be anyone willing to pick it up.

In any case, you need markets with high capitalization, then the trade will be gone from hand to hand in a few seconds.

Swing trading is used in the spot, stock, futures, and forex markets. Initially, the swing technique was practiced in the futures market, where the mass of instruments - indices, metals, commodities, grains, energy. If you add stock futures, you get a huge range of unrelated instruments for swing trading.

Now swing trading is more common in forex, there are enough assets with low correlation, there are metals and energy. And besides that, there's a low entry threshold. Swing trading in forex works out great. It's practically the only short-term strategy you can practice here without worrying about spreads.

Which Time Frame is Best?

The best time frame for swing trading is one hour and larger. The problem with lower M1-M5 time frames is price noise. The trader needs to catch a clear-cut moment of correction reversal and open a trade now of trend resumption. But price noise introduces imbalance into the movement. At a short distance, the price can go in the trend and turn around again, making it impossible to analyze accurately.

Another problem with low time frames is the accuracy of quotes history. Any strategy should be tested on the history before it is implemented in a real account. If the data is missing in some areas when loading the quotes archive, as it often happens in the 1-minute time frame, the testing results will not correspond to reality.

Why H1 intervals are better:

• Excluded influence of price noise. The weak influence of fundamental analysis.
• Possibility to make the most of the trend. Positions can be held in the market for several hours or several days. And for long-term trading, where the trend is more pronounced and stable, it requires higher time frames.
• There is less emotional load. Trades open in the hour time frame are sufficient to be checked once or twice an hour. The lower the time frame, the more often you need to monitor the chart.
• The higher lucrativeness with the same strategy. For example, you open a trade at the end of the correction and set Take-Profit at the level of its beginning. If the main trend continues, the price may return to it after 3-6 candles, depending on the depth of the correction. In the M15 time frame, the average length of a candle body is 30-40 points in 5-digit quotes. In the H1, it is 70–100 points.

An hour and daily time frames have a disadvantage - signals for entry appear much less frequently in comparison with time frames M15-M30. So, choose the time frame that you feel most comfortable with.

Swing traders use one trick in terms of analyzing the energy state of the market. The lower the time frame, the higher the emotional component. And vice versa, the higher the time frame of formation of one iteration, the less emotionality is in traders' actions. Before opening a position, a swing trader necessarily uses this fact and analyzes several time frames in addition to the main one. One of the variants of this tactic was described in detail by Alexander Elder in his Triple Screen System.

Swing Trading Strategies

There are many opportunities to create a successful swing trading strategy in the forex market. The idea is to identify a strong, sufficiently long price movement in time and, as they say, "join the ride" in time.

Below we will consider several such strategies based on various tools of technical analysis (channels, Moving Averages, etc.). They are quite reliable techniques, but you should not take them as a recommendation for action and use them without careful preliminary analysis and reflection. After all, as you know, technical analysis contains a lot of subjectivity. Therefore, its methods should be used wisely, if possible, trying to assess the conclusions based on them with a critical eye.

Strategy 1: Trend trading

Trading in the trend has long been a classic in the forex market. Most of the trading strategies necessarily consider the direction of the exchange rate movement, and some are based solely on it.

The trend strategy means the opening of all trades in the direction of movement of the current trend, i.e. during the growth of the currency rate only buy orders are opened and during the decline only sell orders are opened.

The main objectives of this method of trading in forex are to determine the trend direction at the selected time frame and the calculation of the correction and its places of occurrence. These two indicators will serve as the basis of any trend strategy.

Unfortunately, no one can be fully confident in the current direction of the trend, we can only speculate where the price will move shortly, in addition, when calculating the direction on the working time frame, it is always necessary to consider a longer time frame.

And here is how it should be done:

1. Determining the direction of the trend - there are several ways to do this:

• The first is the easiest, it uses trend indicators, we choose and download the tool we like, then install it in the chart and based on its data select the direction of trades. It is desirable to install two technical indicators at the same time, it will make the analysis more accurate.
• Add support and resistance lines to the chart, they perfectly show not only the direction of the current trend but also allow you to analyze the dynamics of the correction. It will be ideal if you build the support and resistance lines simultaneously with the installation of the trend indicator.
• Carry out a comparative analysis - to do this, you should compare the direction of the exchange rate of several pairs with the same base currency. For example, USD/CAD, USD/CHF, USD/HUF, USD/JPY, and if on the time interval H1 for all observed an uptrend can safely declare the presence of an uptrend for the American dollar, and not a fall in the quoted currency rate in the currency pair.

If you want, you can also use indirect correlation, that is, you can analyze pairs, in which the dollar is the second currency.

2. The correction of the rate - this indicator also plays an important role in the trend strategy, its data is used both for market entry and placing of Stop orders, the easiest way to determine the size of the correction is to build a price channel. True, it should be noted that all calculations are only approximate, the market rarely moves with the same dynamism.

Once you have established that in your time frame, the average size of the correction is, for example, 30 points, you can begin to find a good entry point into the market and determine the level of Stop-Loss, it is usually one and a half times the correction. If desired, you can try to benefit from a single trend movement and close the trade before the onset of a pullback.

3. We enter the market as soon as the previous correction is over, and the trend direction should be the same on yours, as well as on the higher time frame.

It is the basic idea because any trend strategy requires fine-tuning on a particular currency pair and in specific conditions.

Strategy 2: Channel strategy

Although many swing traders focus on channel breakouts after a period of consolidation, trading in a channel is probably one of the easiest ways to implement this method. When a currency pair trades within a certain price channel, whether it is bullish, bearish, or flat (sideways), the consistent oscillation of price between support and resistance levels offers numerous opportunities in a relatively short time.

To take advantage of this strategy in the forex market, you should first look for currency pairs trading in a channel. A price channel is defined by drawing trend lines (or support/resistance lines for a flat channel) between two or more highs and lows of a fluctuating price movement.

On a bearish chart, the price is oscillating between the declining highs and declining lows forming a sloping channel (a downtrend). The opposite is true on a bullish chart.

If the currency pair is not in a clear trend and the price is moving between the two horizontal support and resistance lines (within the projected range), we have a flat channel.

Once the channel is identified, the swing trading strategy is implemented in the following, rather simple way:

• In a flat channel, we place long positions when the price touches the support line and close at the resistance line; conversely, we open short positions at the resistance line and close at the support line;
• In an uptrend channel, only long positions are opened when the price touches the trend line (support line) and are closed at the resistance level;
• In a descending channel, we trade only downwards, opening short positions from the trend line (in this case, it's resistance) to the support line.

Strategy 3: Counter-trend trading

Any counter-trend trading strategy assumes of a swift change in the direction of the current price. Market entry is made not after the reversal has already occurred, but immediately upon receipt of data on the probability of such an event.

There are different variants of the entrance in the counter-trend strategy.

1. based on levels - as soon as the price reaches a certain level, the position in the opposite direction is opened, the number of times the price reversal at this level and the probability of its breakout are considered.
2. based on technical oscillators - which determine the overbought and oversold zones, the most well-known of them is Stochastic. In this case, a buy position is opened if the oscillator enters an oversold area and begins its exit movement, and vice versa.
3. based on the price movement cycle - if there is a probability that the currency pair within a certain time goes up and down, i.e. a certain cycle is observed, the position is opened when the old cycle is overvalued and before the new one starts.
4. based on the candlestick analysis - there are so-called reversal figures, after their appearance, it is possible to place orders against the existing trend.

The main advantage of using trading strategies against the trend is that at the beginning of a new trend, there are often sharp price jumps, so most traders are simply too late to open a position.

At the same time, it is necessary not to forget about high risk, for its reduction trades are usually hedged, that is one more order is placed, but following the trend. If the reversal occurred, a Stop-Loss is triggered on the trend order, and if not, the second position is closed.

Strategy 4: Moving Averages

Moving Averages have long been firmly included in the arsenal of traders using in their work methods of technical analysis. They are easy to use and unambiguous in interpretation. And although often, they cannot be considered sufficiently accurate. Nevertheless, correct use with other tools will help you achieve good results.

Below we will consider a trading strategy based on MAs of different periods combined with reversal candlestick patterns. Here are the MAs we will need:

• A fast МА with the order of 10;
• A slow MA with the order of 30;
• A very slow MA with the order of 200.

By the way, the order of MAs, in this case, is not a constant, it can be changed, we can experiment with different periods and try to select the best one for each specific asset.

We need a very slow MA to identify the direction of the dominant trend on the chart. If it is located under the graph, it is an uptrend, if it is above the graph, it is a downtrend.

One should bear in mind that due to a rather long lag (and we do remember that the bigger is the order of MA, the bigger is its inertia, and consequently the lag) to the moment the current trend fades, the moving indicator will still point to its presence. Therefore, the most accurate signals of this strategy will be in the initial and medium phases of the trend.

We need two MAs with periods of 10 and 30 as markers for determining the zones for the potential position opening. When the price is between them, we will expect the formation of reversal patterns for a confirmed signal to open a position.

Improving your strategies

A successful trading strategy is one of the important tools to gain income in the financial markets. It is a "currency generator" on which you can always make a fortune.

But strategies don't last forever, even the best ones. This is because the market is constantly changing. Many of the ones that worked in the previous century have lost their relevance as more speculators have entered the large-cap market, high-frequency robots have arrived, and the fundamental conditions in the world economy have changed.

This means that at some point the strategy may "stop working. And consequently, it either needs to be fine-tuned or is subject to "write-off". But if you developed it yourself, you know how it works, you have spent enough time in the market, you can create another one from scratch, adapting it to the new realities.

To successfully change the strategy, it is necessary to:

• analyze it;
• to find the "broken link";
• replace it, keeping the other parameters, if possible.

For example, at some point, the volatility of the instrument may slow down or become completely unpredictable and illogical because of the crisis phenomena and increased uncertainty in the market. The risk/reward ratio of 1:3 ceases to work. Either the Stop-Loss is constantly being triggered and the price then goes in your direction, or the quotes have stopped reaching Take-Profit.

You can change one or both parameters. And then retest since it will already be a new strategy with different parameters. To improve or refine the strategy, it is necessary to constantly analyze it, keep statistics, and ideally a trading diary. It not only fixes the result but also gives comments on the transaction.

For example:

• there was an exit on a Stop-Loss, after which the forecast worked out;
• quotes did not reach the target, although they were getting close to Take-Profit;
• the drawdown increased;
• indicators began to give falser signals;
• the position is closed at Take-Profit, after which passes another 20% in your direction.

If one or more situations often repeat, you can suggest what changes need to be made to the strategy parameters.

Managing Risk in Forex

Trading brings with it great return opportunities, which nevertheless come with risks. It is logical, as well as the fact that every coin has two sides.

However, the forex market has a significant advantage - the risk is completely manageable. For this purpose, there is such a tool as Stop-Loss, as well as several parameters, which should be considered additionally to the trading strategy.

So, a risk management strategy should include the following main parameters:

1. The ratio of Stop-Loss and Take-Profit in a trade. For some strategies it should not be less than 1:2, for others, it should not be lower than 1:3;
2. Maximum risk per trade. It is measured in percent of the deposit, based on the maximum possible number of losing trades in a row (it is determined during the strategy testing).

The trading lot volume is calculated based on the lot size, i.e. the volume of entering the position according to the strategy.

Additionally, it is necessary to consider the psychological component of trading and determine in advance what number of losing positions you temporarily stop trading.

Money management

Successful traders consider one of the main elements of any trading system to be a competent approach to money management.

For successful implementation of money management into a trading system, a trader needs to master the basic rules while trading in the forex market.

Money management is most defined as - techniques of managing trader's funds using the rules aimed at capital preservation.

The basic rules include:

• Limit the time you spend on the market;
• Define the minimum size of investment;
• Know your behavioral peculiarities in stressful situations;
• Timely recognize tilt, know how to resist it;
• Keep records and statistics.

The use of these, at first glance, simple and well-known rules can help to achieve success for a trader using any, even the simplest trading system. Money management rules should not be neglected by experienced traders, regardless of the current trading situation on the market.

Top Tips for Forex Swing Trading

When trading, swing traders follow a certain list of rules, and we'll list them now:

• To enter the market, it is best to prefer a medium-term trend in the initial growth stage;
• The correct entry into the market is characterized by the immediate growth of your position in the direction of a gain;
• If you have not yet reached your goal and continue to get returns, the position should be moved to the next day;
• If the position is making a loss, it is better to close it at the first opportunity, to be able to open a more beneficial trade;
• If you can attain more yield than expected, take what you can.
• Even if the position is a small return, get out of it at the first sign of stoppage, to minimize the risks;
• At the same time - know how to wait, don't close a trade prematurely.

Choosing a Broker

The success of swing trading depends on the brokerage company you work with. How not to make a mistake and choose wisely? Priority should be given to trustworthy intermediaries with a good reputation. Before you open an account with the company, we recommend collecting information about the broker: how long it operates in the market, what spread and leverage conditions it provides, what kind of reviews it has. It is most reasonable to choose a broker that has been on the market for several years and has already gained a good reputation.

Summary

Swing trading can be characterized as professionalism on the verge of art. Profound understanding of theory, knowledge of many trading tactics, and the ability to quickly find non-standard combinations are the first requirements for a trader who chooses this style of trading. But to be successful as a swing trader, you need to understand and feel the processes on the market. The model of cycles, price models, volumetric analysis methods are areas where it is necessary to develop constantly.

It is not easy to become a swing trader. But if you set your mind to it, after a while you can consider yourself a truly "universal soldier" who can get outstanding results under any conditions and with any tools.