You’ve probably overheard traders throwing the word “swing trading,” but do you know what it means? This comprehensive book will cover all you need to know about swing trading, from the definition of swing trading to the most common swing trading indicators to successful swing trading techniques.
What is swing trading?
Since the financial markets are so varied, there are a plethora of strategies that may be used to generate a profit. As a result, there is a wide range of trading styles to go along with the many trading tactics. Choosing a different period to trade in might be one of the most noticeable differences in trading styles.
Long-term traders looking to ride out trends over many months or even years are on one extreme scale. Trading over a lengthy period may result in substantial gains. But there is always the risk of losing money while trading.
In addition, day-to-day involvement in a long-term trading strategy is often minimal. However, you’ll need more patience since your trading possibilities will be reduced.
Scalpers are on the opposite extreme. Scalpers engage in many minute-long deals to maximize their overall earnings.
The brief duration of these transactions has benefits, including reducing your overall exposure to the market. And since you’re merely monitoring for minute shifts in cost, trade opportunities abound.
Scalping has several drawbacks, like as
- A significant commitment of energy and focuses
- and the need for highly organized and systematic departure management.
- Due to the frequent trading, and transaction expenses might add up.
Day traders are the next tier up from scalpers, holding positions for a few hours but a maximum of a day to prevent being caught off guard by overnight news that might significantly impact the market.
Swing trading is an intermediate kind of trading that involves holding positions for a few days to a few weeks. The goal of the swing trader is to capitalize on more significant price fluctuations (swings) than would be possible in a single day of trading by identifying chart patterns that span many days.
Many individuals use this method because it strikes a good balance between the time commitment required to make trades and the time spent trading.
Advantages of Swing Trading
We shall examine some of the benefits of swing trading below.
Investing in the short term is time-consuming because of the need for regular monitoring. Long-term transactions involve a great deal of trading discipline and may need to be more exciting for confident investors. A swing trading method’s more manageable time range makes it more attractive to novice traders.
Instead of relying on short-term volatility, as is the case with scalping and day trading, swing trading enables investors to capitalize on longer-term trends. Trading on a shorter time frame is more susceptible to noise and misleading signals, whereas longer-term analyses provide more reliable results.
As a result of transactions following lengthier trends, there is a more significant time for each trade to turn a profit.
The spread, or the difference between an item’s buy and sell prices, is one of the most significant expenses associated with trading. Although spreads are nominal, they are deducted from every transaction and might eat into earnings if you engage in high-volume trading. On the other hand, swing traders are less sensitive to spreads since they make fewer deals and hold them open for longer.
Disadvantages of Swing Trading
What are the significant drawbacks of swing trading?
Swaps are fees levied on overnight CFD holdings and may add up quickly. Short-term traders (scalpers) don’t have to worry about these costs, but longer-term investors could.
You risk having your swing trading technique adversely impacted by fundamental factors, such as the possibility that economic or political events occurring outside of trading hours may influence the financial markets and break an existing trend.
Swing Trading Strategies
- Trading on the swings is more of an attitude than a method. Nevertheless, many swing trading methods apply to this time frame, which characterizes the style. Therefore, it might not be easy to zero in on the most effective Forex swing trading technique.
- The following techniques are not exclusive to swing trading or the Forex market and are based on the same principles of support and resistance as most other technical trading approaches. Three potential swing trading methods for 2022 are described below.
Trend Trading
Trend trading is a straightforward approach to swing trading that newcomers may use.
Realize that markets usually move differently when trying to determine a trend. They rise and fall in stair-like increments even while following the trend.
When the market makes new highs and lows, we call this an uptrend, and when it does the opposite, we call this a downtrend.
A typical zigzag rise, beginning in March 2020 and extending for almost a year, is seen in the above bar chart. A pullback occurs inside the area shown by the red square, even if the overall trend is favorable.
Currently, the market is not reaching new highs, while lows are getting lower. After this temporary reversal, the rise will continue.
Our goal with this swing trading technique is to capitalize on the positive trend we’ve seen, but only if we have reason to believe it will sustain itself.
For how long will this downturn last? There is no way for us to find out. So instead, we keep our eyes peeled for signs that the market is resuming its prior direction.
So, to rephrase:
- Do some trend analysis.
- View the current trend and wait for a reversal.
- Get in when the counter-trend has had time to run its course.
The telltale indicator we are looking for is the market’s return to making higher lows.
An alternative approach would be to ride the trend for as long as possible. In this modified technique, we do not impose any constraints. The answer is obvious: Neither the length of the trend nor its potential height is known at this time. Therefore, we will not attempt to foresee the future by establishing a price objective.
You have to sit tight, keep your wits about you, and let the market go through several negative swings before you can act. It also implies that you will have to give up some of your unrealized gains before cashing out if the trend breaks. However, if you can ride a trend for longer, you may make up for it and more.
Counter-Trend Trading
This second swing trading approach is the antithesis of the first. We still use the same ideas for spotting relatively short-term trends, but now we want to capitalize on the regularity with which they tend to fail.
As we observed earlier, trends often pause for a while at the beginning before continuing on their upward trajectory. A trader attempting to profit from a reversal in trend would do well to time their moves to coincide with this timeframe.
To profit from a reversal, swing traders must first recognize that it has occurred. When an uptrend reaches a new high and repeatedly fails to make a new one, we know a reversal is imminent and may prepare ourselves by going short. In a downward trend, however, the reverse holds.
Discipline is crucial while counter-trending wildly if the price swings against you. You need to be willing to accept that you were incorrect, get out of the trade, and put the whole thing behind you if the market continues its trend against you.
Moving Average Swing Trading Strategy
Both the red and green lines in the following graphic are MAs.
- A 25-period simple moving average is shown in red.
- A 100-period simple moving average is shown in green.
Both moving averages are used in our strategy for detecting market activity. We utilize this indicator as an input signal into our swing trading method, along with a stop loss and take profit.
When the red line travels under the green line, it hints that prices will shift in that direction and is a call to join the market there.
The more extended green MA is crossed by the shorter red MA three times in the above graph, as shown by the red vertical lines.
The red moving average (MA) dropped below the green moving average (MA) on March 17, 2021, and again on July 5, 2021. It’s an indication that the time has come to start selling. The signal to purchase was given on May 13, 2021, when the red MA passed over the green MA.
Keep in mind that the trend will have already begun before we get our signal with this swing trading method because of the lagging nature of the MA.
A Versatile Strategy
Watch our prior webinar to learn more about swing trading and a flexible swing trading method suitable for beginners.
Improving Your Swing Trading Strategies
Your swing trading methods may be improved by experimenting with several different approaches. The first is to examine a more extended time frame to time your trades with the prevailing long-term trend. Wait to trade until the direction fits the overall trend.
Use a secondary swing trading indicator as a filter to further refine your technique. For example, consider the RSI (Relative Strength Index) if you are a counter-trend trader thinking about going short because you believe the market is overbought.
Similar to the Relative Strength Index (RSI) we discussed earlier, a moving average can be a valuable indicator for your swing trading strategy. By averaging price movements, an MA reveals the underlying trend more clearly. In addition, since an MA uses historical data, it’s simple to see how current prices stack up to the past.
When do the trends turn against you?
What happens if we miss the deadline for closing a swing trade?
Market price fluctuations are inevitable. Thus, prudent risk management is essential. As an example, let’s look at this concerning the GBP/USD exchange rate.
- The moving average swing trading approach we examined before would have given us a buy signal on March 16, 2016, when the red MA crossed above the green MA.
- It wasn’t until early on June 24, 2016, that the results of the Brexit vote in the United Kingdom were precise.
- So, what did you find out? First, the British pound plummeted in value, as the GBPUSD dropped several hundred points in just a minute.
- We would have been stuck in a terrible deal if we had held on to our long position without appropriate protections.
- Effective risk management is crucial for successful swing trading. Without a proper take profit and stop loss order, we risk losing all of our investment should the market take a turn for the worse.
The Best Swing Trading Indicators
Some of our favorite swing trading indicators are as follows:
Parabolic SAR CCI Admiral Donchian Moving Average MACD Awesome Oscillator
Top Tips for Forex Swing Trading
Here are our top recommendations to help you succeed as a swing trader now that you know the fundamentals of swing trading and some Forex swing trading tactics.
Follow the long-term trend in your transactions. First, look at a longer-term time chart (D1 or W1) to understand the long-term trend, even if you’re primarily interested in a shorter-term time chart (H1 or H4). After that, check whether your trades go against the more significant trend. When swing trading, it’s best to go with the trend rather than try to fight it.
Utilize simple moving averages (MAs). The MA indicator may smooth out short-term price volatility to better detect the trend, making swing trading more effective.
Make some leverage. Using leverage may increase your returns by allowing you to take on a more significant stake than your initial investment would cover (and your losses). In a nutshell, leverage is a tool that, when appropriately utilized, magnifies the effects of profitable transactions. One must use care while using it, though.
Use a diverse set of currency pairings to trade. To maximize your chances of success, it is necessary to keep an eye on as many currency pairings as possible. There will always be chances to trade in the foreign exchange market; it’s up to you to choose the ones that are a good fit for your trading approach, strategy, and level of comfort with risk. One way to reduce the danger of losing everything is to spread your trading capital over many currency pairings.
Keep an eye on trades. Swaps represent an overnight interest rate charged on open positions. Considering the expense of such exchanges is essential for prudent financial planning.
Try to control your feelings. Instead of trading based on your feelings, you should use your swing trading method in the context of a comprehensive Forex trading plan.
Final Thoughts
Swing trading is an approach that works well in turbulent markets because it provides numerous entry and exit points.
With a swing trading technique, you’ll still need to devote a significant chunk of your time to keeping tabs on the market, but the time commitment will be lower than with other trading methods that focus on even shorter periods. And even if you’re more comfortable with day trading or scalping, you may still benefit from the diversity and added profit potential of swing trading tactics.
However, swing trading is only for some, so it’s wise to get some practice on a risk-free sample account before committing to it for real. Join Admirals’ sample trading platform now by clicking the banner below and putting your swing trading techniques to the test:
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