Swing trading is a trading method that can be used when trading stocks. The purpose of swing trading (swing from English – to swing, swing) is to identify the general trend, and then make a profit when trading swing within this trend.
How swing trading works
Swing traders tend to work with the underlying trend of the chart, such as an uptrend. What is the process of making a decision to buy an asset? Traders can be guided by the following rule: buying when the trend rolls back (that is, at the time of correction), and taking profit when the main trend is canceled. One of the signals to fix positions is a breakout of the support line or curve.
It happens that neither a bullish nor bearish trend is present on the chart (this can be called “calm”). At the same time, the chart still moves in a somewhat predictable pattern within the channel, where the price fluctuates between parallel resistance and support lines. If this channel is clear and well-formed, then traders can also start active trading, while reducing the volume of positions due to higher risks when the trend exits the “calm”.
Thus, the lowest point reached before the start of an uptrend is supported. In this case, the trader can take a long position near the support area and fix it at the moment of correction, or wait for the trend cancellation to close his positions.
A swing trader usually studies long-term fundamental trends in stocks and can hold stocks not only for several hours but also for several weeks or even months – it all depends on the duration of the trend. The duration of the trend may depend on the general market sentiment. This parameter reflects either the price of the index, which includes the stock or from the positive news of the area where the company operates, as well as its results of work by quarters.
Differences and similarities between day and swing trading
Swing trading and day trading may seem like similar methods, but they still have a fundamental difference between the two: time. First, the timing of such transactions is different. Swing traders can keep trades open for seconds or a couple of hours, or for several days. Day traders usually monitor the trade for several days or weeks.
Swing traders' short trades often mean that they are unable to keep positions in balance. As a result, they avoid the risk of out-of-office news releases, as negative news could negatively impact the deal.
The problem of such mistakes with frequently unprofitable trades may be due to the fact that the trader is not sufficiently focused on trading, and the discipline of conducting transactions is not harmonious. As a result, simple failure can lead to poor profitability A series of bad trades can devastate a trader's account so much that there is little or no chance of recovery. This leads to the second difference between day trading and swing trading: commitment and discipline.
Correct day trading requires focus and attention on multiple positions and a constant search for new potential opportunities to look for new opportunities to enter the market.
One of the advantages of swing trading is that this method causes fewer emotional breakdowns due to less monitoring of positions because trades can take from a couple of days to weeks. Positions can be checked periodically, and part of the trade can be automated. For example, when critical price points are reached, letters come to the mail or sound notifications in the terminal itself. Therefore, there is no need for constant price monitoring. This allows swing traders to diversify their investments and maintain psychological balance when investing.
What strategies can be used when trading swing
Analysis and observation of prices in conjunction with technical analysis. This method is standard for most swing traders. This type of analysis helps a trader determine which stock or ETF to trade. The elements of technical analysis can be different, but they all should help determine the trend, for example, the Moving Average indicator or the MACD.
The finance world allows you to define the support level in an uptrend in the main trend, and the resistance level in a downtrend. Traders can use Fibonacci tools such as Fibonacci Levels to help set price targets, as well as to identify retracements.
Fundamental analysis. Another common swing trading method is to track the news background. There are many tools that allow you to follow the news of companies in order to respond in time to both positive news, for example, good statistics for the quarter, and negative news, for example, an unwanted change of leadership.
Index analysis combined with a fundamental method. Some of the traders, in addition to analyzing the company, also monitor the news of the sphere, which is a profile for the monitored asset. For example, you can subscribe to news related to the oil industry if there are open positions for this type of company.
To increase the possible likelihood of winning trades, traders can use the Index Monitor. For example – S & P500, which has many companies. The index is the very indicator that shows the general dynamics of crowd sentiment.
You can also add track the price of the company's competitors, because if competitors began to lose value, then the traded asset may also soon fall.
Work against trends. Some swing traders work with the trends of their stocks, but they can also trade against the trend (sometimes called “fading”). It is possible to take a bearish position during the swing high of an uptrend, then exit when the correction is complete, and then go long during the low of a downtrend.
Using Japanese candlesticks. Some traders find that candlestick charts are easier to understand and interpret than traditional histograms. Traders can use charts to determine where buying pressure is present and where selling pressure is present (as well as how intense that pressure is), and then they can apply this information to their trading.
Surveillance strategy advice
Most of the time, markets are dormant, generating little revenue for buyers. Usually, they combine for several days, make several pauses, decrease and grow again. Small swings are more common than large trends. The art of swing trading captures profits from these small swings.
Swing traders can select assets or futures from the most actively traded stocks from ETFs (Exchange-traded funds), which tend to fluctuate in wide, well-defined channels. A trader can maintain a list of the stocks that are in the ETF for daily monitoring in order to learn about the movement of the trend and respond in a timely manner. Meta Trader 4 helps you with this strategy by creating separate profiles for each ETF. The platform also helps to use tools for technical analysis of the trend, including plotting graphical lines and curves on a chart, to improve the accuracy of forecasts.
Rather than aiming for 20% to 25% profits for most stocks, traders can aim for more modest profits – 10% or even as little as 5% in tougher markets. These indicators may seem too small, not the same as usually found in the stock market. But this is precisely the factor of this strategy since the main thing in the swing trading method is time.
The main focus of a trader may not fluctuate on the profit that develops over weeks or months but on the calculations. Typically, the average transaction duration is more than 5-10 days. In this way, traders can make many small wins, which, overall, will result in much larger cumulative profits. If a trader is happy with a 20% gain in a month or more, a 5% to 10% gain every week or two can significantly increase the overall profit.
Of course, traders should still consider losses. Smaller profits can only lead to an increase in the portfolio if the losses are small. Instead of the usual stop loss (stopping trading and withdrawing funds for a short time) from 7% to 8%, traders can take into account their losses faster, and lose a maximum of 2% to 3%. This will provide a 3-to-1 profit-to-loss ratio – which is a reasonable rule of thumb for portfolio management to succeed. This is a critical component for the entire system, as huge losses can quickly wipe out significant progress made with lower revenues.
The strategy “capture profit on increasing chart”
Since it is not known how many days or weeks the trend might last, traders can enter a bullish swing trade only after the stock appears to have resumed the original uptrend.
One way to identify this is to highlight a move against such a trend. If the stock is trading above the previous day's high (the highest point of the Japanese candlestick), the swing trader can enter the trade after performing the risk analysis we covered in the previous strategy. This possible point is called the “entry point”.
First, find the lowest point to determine the “stop” (stop loss) position. If the stock falls below this point, you must exit the trade to reduce your losses. Then find the high point of the recent uptrend. This becomes a profit target. If a stock hits your target price or higher, you should consider exiting at least part of your position to lock in some profit. It's pretty simple if you look at this graph:
Taking Profit for a Swing Trader on an Up Chart
Conclusion on Swing Trading
Swing trading is an interesting technique for trading small swings on the chart of an asset or future. It has an average duration and minimal need to be chained to the screen.
This method can be suitable for day traders who do not have enough time for their practices or those traders who would like to learn how to properly respond to price changes, reducing their losses to an acceptable level.
Trading in the financial markets carries a high level of capital risk. In order to reduce risks, it is recommended to strictly follow the rules of money management and always set Stop Loss. All decisions that a trader makes when working on Forex are his personal responsibility.