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Swing trading strategies

2020-09-15

2020-09-16

Swing Trading StrategiesOleg Tkachenko

The article covers the following subjects:

Swing trading strategies

Trending strategies can be classified into several groups. For example, trading on breakdown of levels or long-term strategies. Swing trading is a type of trend trading that allows you to catch local corrections and open trades at their bottom at the best price. It is considered one of the best trading models for beginners, since the trend can be quite accurately predicted in a short section, so the risk is minimal. Keep reading to learn how to use the best swing trading strategies.

Swing trading: how to make money on trend rollbacks with minimal

risk

Any market has two main states: pronounced directional movement up or down (the so-called trend movement) and flat - lateral price movement. Counter-trending strategies involve opening positions before a potential price reversal. But theory says that “trend is a trader’s friend” and counter-trending tactics are a way to lose your deposit quickly. Swing trading is one of the types of trending tactics that involves opening positions in the direction of price movement at the bottom of local rollbacks. This trading model is interesting because with strict adherence to the rules of risk management, the number of loss-making trades to profitable ones is relatively small, and the strategy itself is easy even for a novice trader.

In this review you will learn:

  • What swing trade is and how to make money on local rollbacks.
  • How to develop risk management for swing trading strategies.
  • The rules for opening and closing positions, risk management.
  • How to make money on swing strategies: a practical example in a real chart.

Swing trading strategy: description, tools, risk management

A trend is a directional price movement between two reversal points (patterns). It is never perfectly linear. There are impulses and rollbacks. Impulses are areas that form the main price movement. Rollbacks are local corrections in the opposite direction appearing because someone will always trade in the opposite direction or close positions in the main direction of the trend. If you want to know more about how to identify a trend in the market, read [this review][1].

What is swing trading?

Swing trading is a trading model that uses rollbacks (corrections) at the time of the formation of a trend.

A bit of history. This technique was described in detail in the middle of the last century in J. Douglas Taylor’s book The Taylor Trading Technique. He examined the wave movement of the market, highlighting daily cycles on it and breaking them into separate sections. Later, his ideas were developed by other traders. The name of the model comes from the word swing.

If the market has a pronounced directional price movement, logic suggests that it should be used. But where is the guarantee that the trend will not turn around and the attempt to jump into the last car will be successful? In swing trading, we enter at the time of trend correction. For example, in a growing trend, the price rolled back a little and turned towards the main movement again. At this point, it is obvious that the price will at least return to the previous level (it is important to distinguish the correction from the reversal). Schematically it looks like this:

We look for the beginning of the trend, wait for a rollback. At the bottom of the first rollback, we open a long position (yellow dots) expecting that at the moment the trend continues, the price will reach at least the previous high. We close the position at the first obvious sign of a reversal (below I will tell you about the tools used to identify reversals). And we do this throughout the growing trend. If after the peak we see a clear long downward segment - we do not open a position. We wait for the next reversal, we see that the growing trend is weak, so a downward movement has begun. We enter at the upward correction (green dot).

Swing trading strategy rules:

1. The goal of the swing trading strategy is to open a small number of trades and keep them in the market for the longest possible time. From the point of view of minimizing the risk in the previous example, it makes sense to close the trade at the first local reversal (red dots). But using stop loss, you can keep all trades until the trend changes direction, opening the next trade on a local correction and insuring it at the breakeven point.

2. We trade on long timeframes. In theory, it is proposed to use the daily interval with the horizon of 2-4 candles. In this case you should remember about swap. An alternative is the intervals H1 and H4 and holding the position for several hours inside the day. Shorter intervals should not be used, since price noise introduces unpredictability and imbalance into the model.

3. The bottom point of the next rollback for a growing trend should be above the last low - this is a sign of continued movement. If the bottom is below the previous low, there is a high probability of a reversal.

Example:

Red lines are support levels, from which the price rolls back while maintaining an upward movement. The green level is below the previous red level. This is a signal for a trend reversal.

4. After the price has returned to the level of the last high (to the start point of the correction), we insure the position with a trailing stop at the breakeven level (we set the trailing at the opening point). All correctly opened trades are closed by stop loss or take profit.

Important clarification. The price can be influenced by market makers who know at what level most private traders set their stop orders. In a local correction, they can push the price to the level of the previous extremum so that the positions will close by stop orders, and the price will again go in the main direction. Therefore, we have three options. We close the trade when a reversal appears (if you have time to monitor the chart). We insure it with trailing stop (if you have a stable connection with the broker server). Or we set stop orderss not at the extremum level, but a little further.

5. Do not trade during increased volatility and flats. To do so, you need to know whether volatility is increased or not. Open the volatility calculator on the Investing website and compare the amplitude of the daily movement with the average value.

6. Averaging and other similar methods of saving losing positions are not used.

7. Close losing positions for the night. Your goal is maximum profit at minimum cost.

One of the difficulties of swing trading is the need for constant monitoring of the chart  and the ensuing stress. The trader has to find the entry point while being sure that this is continuing initial movement, and not a correction of a new opposite movement.

Example:

A growing trend with local rollbacks allows building a resistance level. At the peak (the trader does not yet know that this is the peak), another rollback comes, the bottom of which is indicated by a red dot. In accordance with the theory of swing trading, we could open a trade here. But let me remind you: if the bottom of the rollback is lower than the previous low, the rollback may turn out to be a new opposite trend. As we can see in the chart.

The most important skill in swing trading is determining the strength of the trend, the moment of a reversal, and learning to distinguish local correction from the changing direction of price movement. Some sources recommend to link the opening of positions to the wave theory. According to it, there can be cycles of 3, 5, 9 impulses and rollbacks in a growing trend. If you want to look for patterns, you can try. However I would not advise getting attached to the waves. It is easier to use confirmation and forecasting tools.

Tools for identifying the trend and rollbacks:

  • Patterns. Candlestick patterns show the moment of reversal and trend correction.
  • Oscillators and trend indicators. They show the strength of the trend, as well as overbought and oversold zones. Another signal of a future reversal is [divergence]2.
  • Levels. Often the price rebounds from some significant level, at which an accumulation of stop or take profit orders is formed.
  • Market sentiment and multi-timeframe analysis. This is an indicator showing the ratio of the number of orders and trade volumes in market depth. If during the reverse movement on Н1, we see a significant predominance of orders in the direction of the main movement in the Н4interval, it is very likely the reverse movement is only a correction. Read more about it in this review.
  • Correlation. Some assets have a direct or inverse correlation. For example, gold and major currency pairs. Their reversals may come with a delay compared to each other. By looking at the reverse of the price of an auxiliary instrument, you can predict the reversal of the main asset.

This is not a complete list. If you can recommend good tools for a swing trader, please do so in the comments.

One of the sources suggests we earn on rollbacks in a flat as well. The point is to wait for the breakdown of the flat channel and to open positions on a reversal movement inside the channel.

Swing trading practice for beginners

Let me remind you again that swing trading is not so much a separate trading system as it is a profit-making principle. You can use your own strategies for this technique and model different situations. Below is one example of such a strategy.

Initial conditions:

  • Pair - EUR/USD.
  • Timeframe - H1.
  • The additional tool is the Stochastic (14, 3, 3).

You can also apply moving averages, but I see no reason to overload the chart. In addition, moving averages lag with trend identification.

On the monthly scale (scaling affects the way the candles are displayed) and the hourly interval, we look for the latest trend in order to wait for its reversal and start opening trades. In order to show the swing trading zones and the opening points more clearly, I will use the historical data. Let’s suppose that I am currently in the green point.

  1. Three extrema allow you to draw a yellow trend line. Being at the green point, we assume that a trend change will occur when this line is broken, and we also expect a confirmation signal from the stochastic.
  2. The first breakdown occurs at the point indicated by the blue arrow. At this point, the stochastic shows an uptrend, being around ​​the 50th level. But so far it is impossible to say for sure whether this is an inertial breakdown or the beginning of an uptrend.
  3. The price bounces off the level within the downward movement, without breaking it down, and goes up. Stochastic also confirms the upward movement. I wait for the nearest correction, the bottom of which is higher than the previous low (intersection of the price with the level). This is the optimal point for opening a position on a rollback at the beginning of a trend - it is marked with a blue oval in the chart.

In this chart, the yellow rectangles indicate the approximate swing zones in trading, in which we need to find reversal patterns that signal entry and exit points. They are approximate because there are no rules for their construction. Entry points themselves are marked by arrows: the very first with a blue dot is the beginning of the trend (as in the previous chart), green arrows indicate a long position, red arrows indicate a short one.

Comments for the chart:

  • Exit points are not marked in the chart. Each trader decides themselves which strategy to build: try to milk as much as you can out of the trend or close the position at the first reversal. If you choose the second option, close the position either after the first two reversal candles in a row, or after the first reversal candle if its body is larger than the previous one.

In the first square (in the first swing zone) there is a correction marked with a yellow arrow. We don’t enter here, since the bottom of this correction is lower than the previous day (green arrow without contour).

Watch for patterns. For example, the most obvious pattern is a pin bar in the third zone (3rd green arrow without a contour). In the fifth zone, a clear flat is observed. Its breakdown means the continuation of the trend after correction. The most controversial zone from the point of view of technical analysis is the 4th zone. There is almost no correction and the trend behavior is chaotic.

Watch the Stochastic. The main signal is both of its lines coinciding with the direction of the price. Its presence in overbought and oversold areas is an amplifying signal, but not the main signal.

You can build levels based on the first extrema. But do not forget about the need to change the scale to see the big picture.

Conclusion.

Swing trading is well suited to the beginner’s thinking and the main rule of trading to follow the trend. If you catch a strong trend, you can squeeze a lot out of one trade. I should note that in this case, swing trading turns into the classic strategy of intraday trend following trading. So don’t get stuck on labels and names. Build your trend following tactics on rollbacks by adding patterns, levels and indicators as auxiliary tools. And of course, ask questions in the comments and share your experience.

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

  • I recommend trying to trade with a reliable broker [here][3]. The system allows you to trade by yourself or copy successful traders from all across the globe.
  • Use my promo-code BLOG for getting deposit bonus 50% on LiteForex platform. Just enter this code in the appropriate field while [depositing][4] your trading account.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. www.liteforex.com/blog/for-professionals/bullish-trend-and-bearish-trend-what-should-trader-do-with-all-that-zoo/
  2. www.liteforex.com/blog/for-professionals/what-is-divergence-on-forex/
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