Swing trading is a technique used by traders in any financial market to make profits within an interim period. For this type of trading, swing traders use technical indicators to determine the upward or downward movement of a trend and use the potential price movement to buy short-term lows and highs that occur within the trend.
Although it comes with its fair share of benefits, swing trading is highly volatile and increases the risks of trading. So, to protect themselves from the increased volatility of swing trading, swing traders usually implement a variety of strategies or methods to keep them ahead of the game.
While other types of traders may choose to hold medium-long-term positions, a swing trader typically holds their position in a security for a few hours, days, or weeks and uses daily charts to determine the appropriate entry and exit points for their trade. What makes swing trading different is that with the right techniques and strategy, traders use this technique to make short-term profits and even go beyond the profits a regular trader will make.
For instance, rather than targeting a 20% profit that could be potentially made from a long-term trend, swing traders may aim to make 5% or 10% of profits within the short highs and lows of the trend. If done successfully, they may make more than a long-term trader by the time the trend reverses.
Plus, swing trading requires less trading time than any other type of trading, and traders depend on technical analysis tools to make short-term profits. For traders that have a full-time job and don’t want to get into trading seriously, swing trading allows them to make profits because it accommodates the complexities that come with having a full-time job.
On the other hand, trading such short positions comes with higher risk than long-term trading, and unpredicted market reversals can lead to massive losses if not using a proper stop-loss.
Also, since they are focused more on short-term profits, swing traders tend to miss out on the profits they could earn from trading with long-term trends.
It is advisable to choose major securities when doing swing trading. This means that swing traders typically look for the best-performing asset of the week and trade with it. For instance, if you are trading with stocks, you may want to trade leading stocks of the week in major sectors, and for forex, you will need to look out for the current best currency pair(s).
This puts you in a position to make the most profits.
Here are some of the basic methods suitable for swing trading:
Using support and resistance levels on a chart is important to any trader because it provides some form of guidance as it helps traders to understand the current structure of the market. It also creates an opportunity for traders to predict future price movements and make trading decisions, especially when the information provided by the support and resistance levels are confirmed using technical or fundamental analysis.
Using support and resistance levels to trade means that you’re looking for the best time to enter into a trend depending on its direction, and for you to do that, you first need to have well-defined support and resistance levels. You can use trend lines, Fibonacci levels, peaks and troughs, and moving averages to find support and resistance levels depending on what’s comfortable to you.
For instance, you can use 20&50 MA or 100 & 200 MA to set up your support and resistance levels. To use trend lines, connect at least three high points and three low points in a trend. If the trend is strong, the price will continue to bounce off the support line and continue to move towards the resistance line before eventually breaking through.
The most common swing trading method when using support and resistance levels is to buy when the price nears the support level and sell when it nears the resistance level in an uptrend. Another way of trading is to have a price target when plotting the support and resistance levels and trade when the price in the SR levels gets to your target price.
If it looks like there is going to be a reversal of an upward trend or that the price will break through the support line, you can use the falling three methods pattern to confirm any possible reversal. Doing this means that you have a greater chance of managing risks, and waiting for the price to get to your target increases your profit-making potential.
In financial markets, momentum refers to how quickly the price of an instrument changes. Momentum trading as a concept is more concerned about the rate of price change than the direction the price is heading. For example, high numbers going either up or down means that the price is quickly increasing or decreasing in value.
In swing trading, using momentum is a trend-following strategy and is used as a confirmation indicator meaning that it gives extra backing to the new highs and new lows of a price. When the price of an asset continues to move upward and attain new highs, the momentum will increase along with it.
Still, a disconnect can happen where the price seems to be moving upward, and the momentum starts to decrease regardless of the seemingly upward movement of the price. When this happens, swing traders can take this as an early sign that the uptrend is about to reverse and make effective trading decisions based on their new predictions.
You can use momentum by itself in swing trading, but it may not give you the results you expect because you’re only looking at one side of the bigger picture. This is why the best way to use it is as an indicator combined with other tools of technical analysis and risk management for more improved results.
Moving averages refer to the average price of a currency pair over a given period. They are known to be lagging indicators because they do not look at the past data of the asset, and they can be used for short, medium, or long-term trading. Since swing trading requires trading within a short period, short-term moving averages are favored.
The first step when using the MA crossover strategy is to determine which MA you are using. There are two major types of MA used for swing trading, which are the SMA and EMA. The main difference between the two is how they react to price changes, as the Exponential Moving Average (EMA) tends to react faster than the Simple Moving Average (SMA) because it pays more attention to recent price action.
For the SMA strategy, swing traders generally use 20-day SMA, 50-day SMA, and 200-day SMA for trading. When a short-term moving average crosses under or cuts a medium or long-term moving average like the 50-day or 200-day SMA from above, it is a sign that the trend is going to turn bearish or downward and to sell the asset.
In contrast, if the short-term average cuts a medium or long-term SMA from below, it is a sign that the market will turn bullish or start an uptrend. Swing traders can use this as an opportunity to buy the asset with the idea that they will make a profit as the security continues to rise.
Since shorter SMAs follow the price action more closely, you can use SMAs with shorter time periods like a 9-day SMA or 18-day SMA. This way, you can be sure of getting stronger buy/sell signals and make trading decisions after confirming the best entry and exit points with other technical indicators.
The EMA crossover strategy is another way of using MA for swing trading. In the forex market, it is referred to as the forex EMA crossover strategy but is applicable in other financial markets. The EMA crossover strategy mainly requires using two EMA lines using the 20-day EMA and the 50-day EMA on the chart with 2 different time periods.
These EMA lines can be used as support and resistance levels and can determine whether the trend is going upward or downward depending on how the short-term EMA crosses or cuts the long-term EMA as applicable in the SMA crossover. The speed of the EMA helps to understand how quickly the price is changing and the possible direction of the trend, and when combined with other indicators, it can give a clear idea of the underlying price action.
This is an easy trading method for swing traders as long as you remember that a trend in any financial market is not a straight line but a series of ups and downs. The asset can go in a downtrend (a series of lower lows and lower highs) or an uptrend (higher lows and higher highs) and after identifying a trend, usually an upward trend since the goal is to make money, a trader trades when they are confident that the trend is going to continue.
If there is a pullback period, it is advisable to use technical analysis and look for confirmation about how long the pullback is going to persist. When you are confident that the trend is going to continue, the pullback provides ample opportunity to join an uptrend at a favorable price and continue to make profits as it rises.
Swing trading is a great way to make a profit in any financial market, and the best part is that you don’t have to keep your capital in a losing asset because of long-term profits. There are tons of swing trading strategies available, and the strategies discussed here can help you trade in different markets with profitable results. However, you can always add or build upon these strategies as you get to learn about other swing trading strategies.