Swing trading refers to the trade conducted with a multi-day to multi-week time frame. Swing traders work on four-hourly or daily charts, using a combination of fundamental analysis and technical analysis to assess the market and make decisions. Swing traders aren’t concerned about a long-term trend or range-bound markets as they don’t hold their position long enough to be influenced by such factors. The volatility of the market is the key to swing trading success as the larger the number of short-term price movements, the higher the trading opportunities for swing trading.
Key Points
- Swing trading is performed on a short-term basis. Swing traders don’t hold their position long enough to benefit from long term changes.
- The higher the market volatility, the larger the trading opportunities.
- Suitable for beginners too as swing trading uses a user-friendly time frame without requiring spending too much time on analysis.
- Swing trading is suitable for a wide range of instruments such as ETFs, futures, stocks, Forex, commodities, and indices.
What Can You Swing Trade?
One of the advantages of swing trading is that you can use it on a wide range of instruments including ETFs, Futures, and CFD instruments such as stocks, Forex, commodities, and indices. Within the Forex market, swing trading offers a chance to benefit from the high liquidity and volatility to find great opportunities in a short period. Some of the most popular currencies for Forex swing trading include the following:
- AUD/EUR, EUR/JPY, EUR/CAD, and EUR/GBP
- USD/JPY, JPY/CAD, and JPY/GBP
- GBP/AUD, GBP/CAD, and GBP/CHF
- NZD/USD, USD/CAD, AUD/USD, and EUR/USD
In the case of stock swing trading, indices are extremely appealing instruments. Some of the stock indices you can trade are:
- DAX30 CFD
- CAC40 CFD
- Dow Jones 30 CFD
- Nasdaq 100 CFD
- Nikkei 225 CFD
Certain stock indices have larger spreads than other instruments, but you only need to pay the spread once in swing trading, and hence it is irrelevant. This is true for exotic currency pairs such as USD/CZK too.
Is there an ideal time frame for swing trading?
There is no perfect answer for this as it all depends on the trends identified as well as the time they take to conclude.
How To Trade?
To start trading, follow these steps:
- Open an account
- Download and install your trading platform
- Start the platform and make your first trade
- Create a strategy
Best Swing Trading Strategy
After opening an account and starting your first trade, the next step is to create a strategy. As you might be aware, swing trading is a style of trading and not a strategy. The time frame defines swing trading, and you can use numerous strategies to trade. However, the availability of several choices can be a challenge as a newcomer will not be able to identify the best strategy for forex swing trading. But don’t worry, this article will help you navigate through your options and find an optimal strategy.
In this context, it should be remembered that these strategies aren’t exclusive to swing trading or forex. Like all other technical strategies, support and resistance are the key concepts that guide these strategies too. As such, you are offered two choices:
- following the trend
- countering the trend
Whatever you choose, you must be able to visualize and recognize the price action, i.e., the movement of the asset price on the chart.
Let us now consider some of the best swing trade strategies in detail.
Trend Trading
This is a simple strategy, which, as the name implies, follows the trend. It is a good strategy for beginners and can be applied to various trading instruments. As such, it is considered a good swing trading strategy.
While identifying a trend, it's important to understand and acknowledge that markets don't necessarily move in a straight line. Even while trending, markets move up and down - in a step-like pattern. You can identify an uptrend if the market is setting higher highs and higher lows. Likewise, a downtrend is happening if the market is exhibiting lower lows and lower highs. Your best strategy in swing trading should be targeted towards catching and following a short trend.
In this scenario, your strategy should be:
- Look for a market trend
- Await a countertrend
- Enter the market after the counter-trend plays out
You must wait, observe, and let the market move adversely to some degree. If so, in the long run, with the right risk management, you’ll earn enough profits to cover all the losses you suffered when the market trend broke.
Counter-Trend Trading
As the name implies, this strategy involves moving against the trend. It is the exact opposite of the above strategy. However, you’ll use the same principles to identify relatively short-term trends. The difference is that you’ll now try to profit from the frequency with which the trends tend to break down. You must also remember that uptrend means higher highs and higher lows and downtrend means lower highs and lower lows.
We know that the early part of a trend can be followed by a period of reversal before the trend resumes again. When you use counter-trend trading, you would try to catch the swing in this period of reversal. For that, you would try to identify the break in the trend. During an uptrend, it would be when a fresh high is followed by a sequence of failures to break new highs. You should go short in anticipation of such a reversion. During a downtrend, the opposite is true.
While using a counter-trend strategy, you must maintain strong discipline if the price moves against you. If the market trend resumes against you, you must cut your losses and quit.
Moving Average Strategy
One of the other strategies you can use for swing trading is moving averages. Swing traders usually trade with larger timeframes (4H, Daily) and hold the trades for a longer period. So, the best MT4 swing trading strategy could be one with a daily chart. However, swing traders should first choose an SMA and use larger period moving averages to avoid early signals and noise.
Bollinger Band Strategy
The Bollinger band is a popular indicator useful in swing trading as it can reveal potential turnaround points for prices. The band consists of three curves formed with the help of standard deviations and moving averages. A middle band built on moving average for a definite period, lower and upper bands showing standard deviations of the middle band. The middle line is a 20-day moving average and the upper and lower bands are two standard deviations from the middle line.
If the underlying quote moves to the outside of the upper Bollinger band, it is deemed overbought. It indicates the time for taking profits and liquidate. Conversely, if the underlying quote falls below the base Bollinger band, it is deemed oversold. It means that the prices could cover losses. As the underlying quote moves up from the bottom band, the middle band becomes the first line of resistance. If it continues trading above the middle line, it will lead the quote towards the upper line. When the quote moves down from the upper line, the middle line would be the first support. If it fails to hold, then you should pay attention to the lower band.
Improving Your Strategies
You can improve your swing trading strategies in many ways. You can try to match the trade with the long-term trend. It would be better to trade only when your direction matches the probable long-term trend. You can further improve your swing trading by using a secondary technical indicator to validate your analysis. For instance, if you are counter trending, and are looking to sell, it would be wise to check the Relative Strength Index (RSI) to see if the market is overbought.
You can use other tools such as a Moving Average (MA) to improve your swing trading. The moving average tool helps in smoothing out prices to gain a clearer picture of the trend. As the moving average includes historical price data, it is easy to compare the current prices to older prices.
Managing Risk
No matter how careful you are it is a given that risk is a constant factor in trade – this is true for successful traders and swing trading. No trader wins a trade 100% of the time. You may misjudge the market, or the market behaves unexpectedly. You are likely to make a wrong move every once in a while. You can use risk management strategies to make sure your mistakes won't cost you dearly.
Here are some useful tips to reduce risk in swing trading:
- Set your maximum acceptable loss - never risk more than 2% of your account balance on any trade.
- Increase your account balance to diversify risk - start with a larger sum so that you have enough balance in your account to trade a variety of assets and diversify your risks.
- Know your risk profile – understand your risk and volatility tolerance so that you don’t easily panic when things don’t go your way.
Final Thoughts
You would have now understood that swing trading is a style best suited for volatile markets, as it offers numerous trading opportunities in such a scenario. However, swing trading should be considered as a medium and long-term trading strategy and is not an ideal short-term strategy. It is highly dependent on risk and capital management, commonly referred to as money management in swing trading.
Although swing trading needs your time for monitoring and analysis, it is not as complex and arduous as some of the other trading styles with shorter time frames. Furthermore, if you prefer scalping or intraday trading, swing trading strategies can help you to diversify as well as to earn some additional profits
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