The appeal of swing trading is that it provides plenty of opportunities to trade; the dollar risk per trade is lower than with trend trading because of closer stops; it provides greater profit potential opportunity per trade than day trading; The downside of swing trading is that you must work hard all the time to manage trades; you are quite likely to miss major moves and frequent trading results in higher commission costs.
A good argument can be made that beginning traders would be well-served to start with swing trading as it allows enough trading action to gain experience; losses can be limited with proper stop loss techniques, and it provides a good perspective to learn about both the short-term and long-term movements of markets.
How to use this guide:
- Learn the swing trading methodology step by step
- Open a demo account and practice swing trading strategies with virtual funds
- When ready open a live trading account and explore a wide range of markets
What is Swing Trading?
Swing trading refers to the medium-term trading style that is used by traders who try to profit from price swings. These swings are made up of two parts—the body and the swing point.
It requires patience to hold your trades for several days at a time. Swing trading stands between two other popular trading styles: day trading and position trading.
Swing traders identify a possible trend and then hold the trade(s) for a period, from a minimum of two days to several weeks.
It is ideal for those who can’t monitor their charts throughout the day but can dedicate a couple of hours to analyzing the market every night.
Swing trading is best suited for those who have full-time jobs or school but have enough free time to stay up to date with what is going on in the global economy.
Swing trading strategies employ fundamental or technical analysis in order to determine whether a particular asset might go up or down in price soon.
Swing trading attempts to identify “swings” within a medium-term trend and enter only when there seems to be a high probability of winning.
For example, in an uptrend, you aim to buy (go long) at “swing lows.” And conversely, sell (go short) at “swing highs” to take advantage of temporary countertrends.
As a swing trader, your job is to time your entries in a way that catches the majority of each
swing body. While catching a swing point can be incredibly lucrative, it isn’t necessary.
In fact, attempting to catch the extreme tops and bottoms of swings can lead to an increase in losses. The best way to approach these trades is to stay patient and wait for a price action buy or sell signal.
We’ll get into those various strategies shortly. For now, just know that the swing body is the
most lucrative part of any market move.
Because trades last much longer than one day, larger stop losses are required to weather volatility, and a trader must adapt that to their money management plan.
You will most likely see trades go against you during the holding time since there can be many fluctuations in the price during the shorter time frames. It is important that you can remain calm during these times and trust in your technical analysis.
Since trades usually have larger targets, spreads won’t have as much of an impact on your overall profits. As a result, trading assets with larger spreads and lower liquidity is acceptable. Still, you must pay attention to swap points.
Types of Swing Trading
How do you swing trade? There are several different trading strategies often used by swing traders. Here are the four most popular: reversal, retracement (or pullback), breakouts, and breakdowns.
Reversal trading relies on a change in price momentum. A reversal is a change in the trend direction of an asset’s price. For example, when an upward trend loses momentum, and the price starts to move downwards. A reversal can be positive or negative (or bullish or bearish).
Reversals are sometimes hard to predict and to tell apart from short-term pullbacks. While a reversal denotes a change in trend, a pullback is a shorter-term “mini reversal” within an existing trend.
Retracement (or pullback) trading involves looking for a price to temporarily reverse within a larger trend. Price temporarily retraces to an earlier price point and then continues to move in the same direction later.
Think of a retracement (or pullback) as a “minor counter-trend within the major trend”. If it’s a retracement, the price moving in against the primary trend should be temporary and relatively brief.
Reversals always start as potential pullbacks. The challenge is to know whether it is only a pullback or an actual trend reversal.
Breakout trading is an approach where you take a position on the early side of an UPTREND and look for a price to "breakout”. You enter a position as soon as price breaks a key level of RESISTANCE.
A breakdown strategy is the opposite of a breakout strategy. You take a position on the early side of a DOWNTREND and look for a price to "breakdown” (also known as a downside breakout). You enter a position as soon as the price breaks a key level of SUPPORT.
Swing Trading Strategies
We've summarised five swing trade strategies below that you can use to identify trading opportunities and manage your trades from start to finish. Apply these swing trading techniques to the currency pairs, stocks, indices, or cryptocurrencies you're most interested in to look for entry points.
The Fibonacci retracement pattern can be used to help traders identify support and resistance levels, and therefore reversal levels on the charts. Currency pairs often tend to retrace a certain percentage within a trend before reversing again and plotting horizontal lines at the classic Fibonacci ratios of 23.6%, 38.2% and 61.8% on a chart can reveal potential reversal levels. Traders often look at the 50% level as well, even though it does not fit the Fibonacci pattern, because currency pairs tend to reverse after retracing half of the previous move.
A swing trader could enter a short-term sell position if the price in a downtrend retraces to and bounces off the 61.8% retracement level (acting as a resistance level), with the aim to exit the sell position for a profit when the price drops down to and bounces off the 23.6% Fibonacci line (acting as a support level).
Support and resistance triggers
Support and resistance levels represent the cornerstone of technical analysis, and you can build a reliable swing trading strategy around them.
A support level indicates a price level or area on the chart below the current market price where buying is strong enough to overcome selling pressure. As a result, a decline in price is halted and the price turns back up again. A swing trader would look to enter a buy trade on the bounce off the support line, placing a stop loss below the support line.
Resistance is the opposite of support. It represents a price level or area above the current market price where selling pressure may overcome buying pressure, causing the price to turn back down against an uptrend. In this case, a swing trader could enter a sell position on the bounce off the resistance level, placing a stop loss above the resistance line. A key thing to remember when it comes to incorporating support and resistance into your swing trading system is that when price breaches a support or resistance level, they switch roles – what was once a support becomes a resistance, and vice versa.
This swing trading strategy requires that you identify an instrument that's displaying a strong trend and is trading within a channel. If you have plotted a channel around a bearish trend on a chart, you would consider opening a sell position when the price bounces down off the top line of the channel. When using channels to swing-trade it's important to trade with the trend, so in this example where the price is in a downtrend, you would only look for sell positions – unless the price breaks out of the channel, moving higher indicating a reversal and the beginning of an uptrend.
10- and 20-day Moving Averages
Another of the most popular swing trading techniques involves the use of simple moving averages (SMAs). SMAs smooth out price data by calculating a constantly updating average price which can be taken over a range of specific time periods, or lengths. For example, a 10-day SMA adds up the daily closing prices for the last 10 days and divides by 10 to calculate a new average each day. Each average is connected to the next to create a smooth line which helps to cut out the 'noise' on a chart. The length used (10 in this case) can be applied to any chart interval, from one minute to weekly. SMAs with short lengths react more quickly to price changes than those with longer timeframes.
With the 10- and 20-day SMA swing trading system you apply two SMAs of these lengths to your chart. When the shorter SMA (10) crosses above the longer SMA (20) a buy signal is generated as this indicates that an uptrend is underway. When the shorter SMA crosses below the longer-term SMA, a sell signal is generated as this type of SMA crossover indicates a downtrend.
The MACD crossover swing trading system provides a simple way to identify opportunities to swing trade. It's one of the most popular swing trading indicators used to determine trend direction and reversals. The MACD consists of two moving averages – the MACD line and signal line – and buy and sell signals are generated when these two lines cross. If the MACD line crosses above the signal line a bullish trend is indicated, and you would consider entering a buy trade. If the MACD line crosses below the signal line a bearish trend is likely, suggesting a sell trade. A swing trader would then wait for the two lines to cross again, creating a signal for a trade in the opposite direction, before they exit the trade.
The MACD oscillates around a zero line and trade signals are also generated when the MACD crosses above the zero line (buy signal) or below it (sell signal).
How to Swing Trade
- Step 1: Move to the Daily Time Frame
- Step 2: Draw Key Support and Resistance Levels
- Step 3: Evaluate Momentum
- Step 4: Watch for Price Action Signals
- Step 5: Identify Exit Points
- Step 6: Calculate and Manage Risk
Step 1: Move to the Daily Time Frame
Spend most of your time on the daily charts. They offer a bigger picture of what’s happening with the price action and provide more reliable signals. However, not all daily time frames are created equal.
For forex trading, use a specific type of chart that uses a New York close. Each 24-hour session closes at 5 pm EST, which is considered the forex market’s unofficial closing time.
It is possible to use the 4-hour charts for swing trading, but usually the daily works best.
As a rule, price action signals become more reliable as you move from the lower time frames to higher ones.
Step 2: Draw Key Support and Resistance Levels
Apart from Step 1, this is the most important piece of the entire process.
Think of drawing key support and resistance levels as building the foundation for your house. It’s impossible to identify favorable swing trades without them.
Before we show some examples using swing trades, let’s define the two types of levels.
Horizontal support and resistance
These are the most basic levels you want on your charts. They provide a great foundation for trading swings in the market and offer some of the best target areas.
Not all technical traders use trend lines. We have no idea why someone would ignore them, especially a swing trader.
They not only offer you a way to identify entries with the trend but they can also be used to spot reversals before they happen.
Step 3: Evaluate Momentum
At this point, you should be on the daily time frame and have all relevant support and resistance areas marked.
Remember how we mentioned using swing points to evaluate momentum earlier in the post?
Well, this is where those swing highs and lows come in handy.
There are three types of market momentum or lack thereof.
- Uptrend: Higher highs and higher lows
- Downtrend: Lower highs and lower lows
- Range: Sideways movement
A market that’s in an uptrend is carving higher highs and higher lows.
Notice how each swing point is higher than the last. You want to be a buyer during bullish momentum such as this.
On the opposite end of the spectrum, we have a downtrend. In this case, the market is carving lower highs and lower lows.
You want to be a seller here. We’ll get into the various price action signals in the next step.
Finally, is a ranging market. As the name implies, this occurs when a market moves sideways within a range.
Although the chart above has no bullish or bearish momentum, it can still generate lucrative swing trades. In fact, ranges such as the one above can often produce some of the best trades. This is mostly due to the way that support and resistance levels stand out from the surrounding price action.
Step 4: Watch for Price Action Signals
Let’s review where you should be at this point.
Steps 1 and 2 showed you how to identify key support and resistance levels using the daily time frame.
Then in Step 3, you learned to evaluate the market’s momentum. This tells you whether the market is in an uptrend, a downtrend, or range-bound.
If the market is in an uptrend, you want to begin watching for buy signals from key support.
Our two favorite candlestick chart patterns are the pin bar and engulfing bar.
The goal is to use this pin bar signal to buy the market. By doing this, we can position as the market swings upward and continues the current rally.
On the flip side, if the market is in a downtrend, you want to watch for sell signals from resistance.
Again, we use a signal like a pin bar to identify the swing high, also called the swing point.
You might not catch the entire swing, and that’s okay. The idea is to catch as much of it as possible but waiting for confirming price action is crucial.
When looking for setups, be sure to scan your charts. Don’t make the mistake of searching for setups. Those two actions may sound similar but they are far from it.
Scanning for setups is more of a qualitative process. In other words, you’re scanning for the very best setups and if you don’t find anything, that’s okay. Most traders feel like they need to find a setup each time they sit down in front of their computer. This is called searching for setups.
So remember to scan for swing trade opportunities; never go searching for them. We’ve detailed the scanning steps to identify and execute low-risk, high potential yield trades in our trading strategies course.
Step 5: Identify Exit Points
There are two rules when it comes to identifying exit points.
- The first rule is to define a profit target and a stop loss level. Many traders make the mistake of only identifying a target and forgetting about their stop loss. Don’t make that mistake. In order to calculate your risk as explained in the next step, you must have a stop loss level defined.
- The second rule is to identify both levels before risking capital. This is the only time you have a completely neutral bias.
As soon as you have money at risk, that neutral stance goes out the window. It then becomes far too easy to place your exit points at levels that benefit your trade, rather than basing them on what the market is telling you.
So what’s the best way to identify your exit points?
Simple. Just use the support and resistance levels you identified in Step 2.
Remember, those horizontal areas and trend lines are your foundation. Once they are on your chart, use them to your advantage. That involves watching for entries as well as determining exit points.
>> How to set and manage stop-loss orders
Step 6: Calculate and Manage Risk
Once you have identified your exit points for the trade, it’s time for some risk management.
Before we discuss how to identify stop loss levels and profit targets, we want to share two important concepts.
The first is the risk-reward ratio. This is a way to calculate your risk using a single number.
For instance, a setup with a 10-pip stop loss and a 300-pip target is 1:3.
Similarly, if your risk is $100 and you stand to make $500, the risk to reward ratio is 1:5.
The second concept we want to discuss is asymmetry.
A favorable risk to reward ratio is one where the payoff is at least twice the potential loss. Written as a Risk-Reward Ratio, that would be 1:2 or greater.
When calculating the risk of any trade, the first thing you want to do is determine where you should place the stop loss.
For a pin bar, the best location is above or below the tail.
The same goes for a bullish or bearish engulfing pattern. A stop-loss that is 10 to 20 pips above or below the candlestick being traded is a good place to start.
Now that you have the stop loss placement identified, it’s time to determine the profit target.
This is where those key levels come into play once more. Remember that when swing trading the goal is to catch the swings that occur between support and resistance levels.
So if the market is trending higher and a bullish pin bar forms at support, ask yourself the following question.
Where is the next key resistance level?
The answer will not only tell you where to place your target but will also determine whether a favorable risk to reward ratio is possible.
If it is, then you may have a valid buying opportunity in front of you. If not, you may want to stay on the sideline.
Is Swing Trading Right for You?
There is no right or wrong answer here. Finding a profitable style has more to do with your personality and preferences than you may know. In fact, if your chosen style doesn’t fit your personality, you are bound to struggle. The key points below will help you decide if swing trading is right for you.
You might want to be a swing trader if:
- You don’t mind holding your trades for several days.
- You are willing to take fewer trades but more careful to make sure your trades are very good setups.
- You don’t mind having large stop losses.
- You are patient.
- You are able to remain calm when trades move against you.
You might NOT want to be a swing trader if:
- You like fast-paced, action-packed trading.
- You are impatient and like to know whether you are right or wrong immediately.
- You get sweaty and anxious when trades go against you.
- You can’t spend a couple of hours every day analyzing the markets.
- You can’t give up your World of Warcraft raiding sessions.
If you have a full-time job but enjoy trading on the side, then swing trading might be more your style!
It is important to remember that every trading style has its pros and cons, and it is up to you the trader, which one you will choose. We also offer educational resources like CAPEX Academy to help you understand trading and get to know the risks.