Swing trading is an art in which a trader plants and holds a position for several days or weeks. It is one of the most common styles that traders with a busy schedule or associated personality use. Unlike scalping or day trading, swinging your trades requires a lot of patience from your side and, in some cases, a considerable amount of capital as the swaps and percentage gains are on the wrong end.
Learning how to swing trade is, however, relatively more straightforward. For adapting to this style, you can easily pick a strategy, understand and implement it. Our article will cover a few short benefits of swing trading and discuss a few game plans that participants of all levels can use.
Benefits of swing trading
Let us shed some light on a few widespread benefits of swing trading.
- Noise. Trading on the higher time frames eliminates all the noise that comes when you are on the lower periods. The candlesticks will show fewer spikes and display the proper direction of the market.
- Time-saving. As you are on longer time frames, you won’t have to constantly monitor the charts or your positions. Sitting in front of the screen constantly can be lethargic, causing a trader to make bad decisions on a whim. You can combine it with your 9 to 5 job without any hassles.
- Flow of income. Swing trading can become a constant flow of passive income, earning you a decent 5-10 percent return per month based on proper risk management and strategy.
A few good strategies
Learning a few tested strategies that have proven their worth over time is better than forming one on your own.
Support and resistance
It is also called range trading as the market itself is stuck within a support and resistance box. There are specific sellers at a certain price point and buyers on the other end. Neither side seems to give up on their belief, so the asset is held between the two.
Identify these points on the charts and place buy and sell limit orders with a stop loss one ATR above or below. Use the opposite ends as the potential take profits.
Image 1. On the daily chart at EUR/JPY, you can find the price between two support and resistance levels. The instrument can form patterns within the two points.
Catching the trend
For some traders, the term trend itself can be confusing as they fail to understand the phenomenon. To make it easier, we will use the 50 MA. An upward direction of the moving average will indicate an uptrend and vice versa. For incorporating it in our strategy, we wait for the price to revert to the MA and then use appropriate candlestick patterns such as bullish or bearish engulfing to enter a long or short.
Image 2. A stock that shifts itself from a down to an uptrend comes back to the 50 MA. The moving average acts as a support and drives it towards the current trend. Note that the MA acts as a support zone, so don’t expect the price to move back immediately.
This form of trading requires personal knowledge from your side about a company or an instrument. A trader who believes the financial asset is extremely undervalued compared to its counterparts can take a buy position. For example, a tech company offering quality services at a low price compared to its competitors and has a low stock worth may increase its value shortly.
An easy technical strategy that involves the use of Bollinger bands. Go on to your trading charts and employ the indicator. Enter specific long or shorts as the price touches the upper or lower parts of the band. Place the stop loss above or below, and your take profit towards the opposite end.
Image 3. There might be instances when the price touches the upper or lower portion of the bands and trends in a similar direction. The yellow parts highlight all such points. It is recommended to use Bollinger Bands with other indicators.
The breakout strategy is where you wait for the price to get out of a specific support or resistance level, retrace back to the zone and then show some activity to create a particular trade in a similar direction.
To understand better, let us consider an example in the image below where price breaks out of the support on the daily chart at EUR/JPY. It then continues to move a bit lower but decides to come back towards the initial support point. In technical trading, the probability of support to act as resistance after the instruments cross it is high. So we regard this as resistance and enter our short trade with some confidence.
Image 4. A scenario where the prior support acts as a resistance making it a key level.
Type of trade management
There are two types of trade management techniques traders can use while swing trading. Choose the one that matches your style.
- Passive. It involves using predetermined stop loss and take profit before entering your trade. Your risk is also predefined.
- Active. Active management requires you to manage a trade depending on the market movements. Depending on the situation, a trader may choose to exit a position as soon as he enters or keep it open for as long as he likes.