What is swing trading?

What is swing trading?

PLATFORMS

Swing trading is a method of trading holding a position for a period from a few days to a few weeks. This way of trading takes the initiative as the trader tries to take advantage of an established market trend.

Swing traders need to identify the appropriate entry points, then close their positions at key points where the market could turn. Swing is understood as a wave, since a trend is formed from a series of waves, the swing trader’s goal is to take full advantage of it.

How to execute swing trades?

Swing traders often use a combination of fundamental and technical analysis.

Swing traders usually work on the 4-hour chart (H4) and the daily chart (D1). They can combine fundamental analysis and technical analysis to make decisions.

Swing traders often have to work with the markets for a long time as they may have to hold their positions for days. When the price fluctuates sharply relative to his or her position, the trader can hold a smaller position than the day or day trader would normally use more leverage.

That is why swing traders can use low leverage. Margin trading in swing trading can be risky, especially in the case of a volatile market after you have held a position.

To analyze the market, swing traders often use tools that are chart patterns and technical indicators such as moving averages. Congestion patterns like triangles, rectangles, and bevels are the starting points for new trends that swing traders can take advantage of. Similarly, the head and shoulders pattern and the double top are also turning points for making trades.

Stop Loss and Take Profit

Swing trading requires setting a larger stop to prevent the trader from losing a position early. While scalpers have a narrow stop loss of only a few pips, swing traders have stop loss orders hundreds of pips away from their entry. This will obviously reduce the size of the positions and swing traders, so will be less affected by market noise.

They can also set their take profit hundreds of pips away from the entry point. Swing trading positions typically offer a higher risk/reward ratio than day trading and scalping.

Swing trading has a higher risk/reward ratio?

A swing trade will often allow you to take profits further from your stop loss. It also means that we are prioritizing the goal of profit over the risk of loss. In order for an investor to be profitable, the risk/reward ratio needs to be greater than 1 and the probability of success must be above 50%.

Which tool should I use to do swing trading?

You can use all the tools to do swing trading. Each market will operate in a different way. Indices can be stable for weeks and currency pairs can set up regular waves in a trend. Stocks can go up and down rapidly in a short period of time.

The best environment is when the financial instrument draws regular bullish and bearish waves and the market is volatile. This way swing traders can predict reversals to decide whether to buy or sell.

How to do swing trading effectively?

Traders have two options for swing trading.

  • Focus on one tool and take advantage of different models.
  • Focus on a pattern you’re looking for across different tools.

In the first case, we can monitor the daily chart of EUR/USD to enter a trade at the break of support – resistance, retracement and range between min and max price. We will try to take advantage of all the fluctuations of the currency pair.(Read more : swing trading)

For the latter case, the trader may be satisfied with a graphic configuration, for example a support-resistance line break or a triangle breakout. This pattern can be found when selecting different financial instruments, such as on the stocks that make up the Nasdaq 100 or cryptocurrencies.

In this way, we can better organize transactions and avoid the use of random configurations

Strategy of swing trading

There are different methods for swing trading. It is very common for traders to use support and resistance in combination with the Japanese candlestick pattern.

Support and resistance

Trading by support and resistance levels is simple and effective for swing trading. On major timeframes such as daily or weekly charts, support and resistance are more relevant and adhered to by most market participants.

Support and resistance
Support and resistance

Fibonacci Retracement

This indicator is widely used in technical analysis. It allows you to predict the recovery of a trend after a retracement. The most watched retracement levels are: 23.6%, 38.2% and 61.8%. These numbers are percentage retracement of an already formed extension.(Read more : Hedge Fund)

When the Japanese candlestick reversal pattern forms at these levels, it is an appropriate trading signal that you can take advantage of.

Fibonacci Retracement
Fibonacci Retracement

Channel

When the trend becomes stable with ascending and descending waves of the same amplitude, channels will be formed. In an uptrend, channel lows are entry points that swing traders can take advantage of. Similarly, in a downtrend, channel highs are suitable for selling.
By applying the principle of momentum, the swing trader can take advantage of a channel over and over again until the price appears.

the swing trader can take advantage of a channel over
the swing trader can take advantage of a channel over

Breaking

Breaking support and resistance can be highly profitable as it is often accompanied by a rapid rise or fall in price. You can break chart patterns, triangles, rectangles, bevels, and more. These are congestion patterns, they are likely to be broken by the price associated with high volatility.

Some swing traders focus on the support-resistance breakout trading strategy because it allows them to win fairly quickly.

Some swing traders focus on the support-resistance breakout trading strategy
Some swing traders focus on the support-resistance breakout trading strategy

Advantages of swing trading?

Savings on trading costs and flexibility are some of the key advantages of swing trading.(Read more : stochastic tool)

1- Swing trading allows you to profit naturally from stock movements. These fluctuations are always going up and down instead of just going in one direction. Swing traders are not affected by minor retracements within a trend.

2- Swing trading is more economical than active short-term trading. We can only hold a few positions for more than a month and therefore pay much less costs than scalpers.

3- This way of trading is quite flexible so you can do it without interrupting your daily schedule (work, family, etc.). You will not have this flexibility if you choose a day trading method.

4- Swing traders usually have quite favorable reward/risk ratios for their positions. The stop loss of this ratio can be 150 pips from entry and take profit is 500 pips.

Disadvantages of swing trading

Swing traders face stock market crashes and other market disturbances.

1- Holding a security for a long time can maximize your earnings but also increases your risk exposure from a stock market crash. Your exposure will increase when faced with an economic event or profit opportunity outside of trading hours when the market is closed and you are unable to close your position.

2- Swing trading is quite boring as it may not make a profit for many months.

Conclude

Swing trading is very suitable for beginner traders as it is a low-risk way of trading. In addition, swing trading will not disrupt your schedule. First, you will have to take the time to learn and test swing trading strategies.(Read more :depositing and withdrawing money)

If you have a method that is effective and sustainable, you can generate a passive income every year since it is not an active way of trading. However, you also need to be aware of the risks involved in trading in the market

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