Swing Trading Explained

The concept of swing trading appeared a long time ago. This technique was first used as early as in the 1950s and was described by J. Douglas Taylor in the book “The Taylor Trading Technique”. The term swing trading comes from the English word “swing” — span, turn, swaying. Swing trading is the use of price changes to make a profit. In this case, the open position is held for a short period, on average from a few hours to two or three days maximum.

Before reading the article and writing your questions in the comments section, I recommend to watch this video. It’s not long but covers the biggest part of questions on the topic.

As the verb “to swing” can be interpreted as “to go by the measured step” or “to successfully make a trade”. Swing trading requires high professionalism, experience in financial operations, and, mainly, endurance and patience. Another meaning of the verb “to swing” sounds like “being hanged”, this implies not only gaining profits but also exposing yourself to greater risks. If you overstate the position, it may result in significant losses or freeze funds, stopping and depriving the trader of the opportunity to conclude new, more profitable trades.

Why is swing trading so popular?

This style of trading, when you hold a position for two to five days, allows you to manage your trade and leave room for profits to be gained. Active investors use the swing to limit the risk in the market when instable times come. Finally, this approach is attractive to many people who do not want to scalp throughout the day but want to use the opportunities to make money when such opportunities arise in a day or two.

Swing is a part of the market cycle. To use the swing movement, you need to have analytical capabilities that allow you to act flexibly, depending on the circumstances, apply different tactics. The study of the strategy takes time and may seem rather complicated, but the time spent studying this strategy pays off many times.

Mastery of swing trading

• Trade size

This strategy does not involve the use of a large leverage. Since the trades are relatively short, the position of the trader must withstand short-term trend corrections. Calculating the size of the deposit, specific for each trade, can be done by a simple scheme. So, with volatility from 100 to 150 points, the position of the trader must withstand the movement in the opposite direction, not more than 50-70 points. This parameter should be considered as a Stop Loss order.

• Entry points

The entry point is the moment of the trend reversal, the appearance of a new trend in the market (Picture 1). As a rule, this reversal is caused by some powerful news. To predict the changing situation on the market, a constant analysis of the situation is required. The trader should be able to calculate the news which causes a long trend. Picture 1 shows a trend reversal. The price broke down from the triangle and has pushed lower since. This is exactly what swing trading is – catching the turn and riding the trend. A new trade should be made only with full confidence in the turn if the amount of movement against the trend exceeds the standard correction size.

• Duration of the trade

Swing trading trades are maintained while they continue to make a profit (Picture 2). The picture shows that it took 3 days for the price to push from the moment it broke the triangle to the first medium-term support.

• Closing the trade

Closing a trade can be carried out in manual mode or the footsteps. The basis for closing the trade can be considered either a trend reversal that has already begun or the appearance of news that will cause the opposite direction of the trend movement.

Swing Trading Rules

1. To enter the market, it is best to choose a medium-term trend in the initial stage of growth. The correct entry into the market is characterized by the immediately started growth of your position towards profit.
2. If you have not yet reached the intended goal and continue to make a profit, the position should be postponed to the next day.
3. If the position causes losses, you should better close it at the first opportunity to be able to open a better trade.
4. If you can make more profit than you expected, take everything you can.
5. Even if the position brings a small profit, leave it at the first sign of stopping to minimize the risks. At the same time, know how to wait, do not close the trade prematurely.

Pros and cons of swing trading

As you know, there are no ideal strategies. Like any other, swing trading has its disadvantages and advantages. The following are among the main advantages:

• The trader gets the opportunity to earn the general direction of the market. The ability to find the right trend, to see the profit potential that this or that trade can bring, the particular flair of a trader allows you to earn in any scenario.
• Swing trading is not associated with high energy costs and emotional stress.
• Unlike intraday strategies or scalping, the strategy can bring an impressive profit.

Speaking about the advantages, we should dwell on the fact that they all act only when the trader can find the “right” trend and to conduct “correct” trading. Such trading involves a combination of intuition and analytical abilities, allowing you to understand what to do at each particular moment: to hold or close a position, sell or buy.

When it comes to the shortcomings, swing trading usually uses larger time intervals, which means that the initial amount of funds should be larger. It is quite difficult to start from scratch with the help of this strategy. Swing trading implies the existence of at least a minimum of experience that allows you to determine the phase of the cycle in which the market is located, the way the trend moves. Without these skills, a trader is unlikely to be able to calculate potential risks and future profits.

Goals of swing trading

As you know, trading on swings is nothing more than a special style of trading. By using it, you tear off the tidbits from swings in price, raising the stock in an uptrend, or lowering it in a downtrend. Ideally, the upward oscillation, as a whole, consists of several consecutive daily bars, each of them has a higher maximum and, correspondingly, a higher minimum.

A series of bars with lower highs and lower lows forms a downward swing. Your goal is to open and, then, hold the trade until the movement of the stock takes place with a certain, whether positive or negative, (in the case of a short trade) momentum. When the price shows signs of a reversal or correction, it serves as a signal for you to close the trade (Picture 3).

This style of trading is used mainly on the daily charts. Strictly speaking, this is all you need for successful trading on swings. If, however, you have access to intraday charts (for example, 60- or 15-minute), then you can specify the places of your entry and exit, improve risk management.

How do you know if swing trading is suitable for you?

Despite all its advantages, the strategy of swing trading is not suitable for everyone. Even a very talented and successful trader may not be able to cope with this strategy and not take from it the slightest benefit.

Swing trading is the optimal strategy for those who:

• Are patient enough to keep the trade for a few days.
• Prefer not to earn on the number of trades, but on good setups of the perfect trades.
• Have big stop-orders.
• Remain calm, even if the bidding is not in their favor.

At the same time, swing trading is not suitable for those who:

• Prefer active and fast trading.
• Are not patient and want to see the immediate results of his activities.
• Get nervous if the bidding starts to go not in their favor.
• Cannot spend a few hours daily on the analysis of the market situation.

From all that has been said, we can conclude that this type of trading does not suit everyone. However, swing trading can bring high profit and success on any market to those who will be able to delve into all its features, are willing to spend time and effort to improve their knowledge and skills, analyze the market and its dynamics, as well as those who have high intuition in financial matters.