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How to Swing Trade Stocks? Best Swing Trading Strategy on Forex

2021-02-11

2021-02-11

What is Swing Trading? The best strategies, indicators and signals to trade for beginnersOleg Tkachenko

Trend trading strategies can be classified into several groups. For example, trading on level breakouts or a long-term investment strategy strategy.

Swing trading  methods are based on trend trading that allows you to catch local corrections and enter 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.

This article will answer the most popular questions related to swing trading. What is a swing trader? What is a swing trade? What are the best trading strategies?

Read on and you will learn everything you wanted to know about best swing trading strategies.

The article covers the following subjects:

What is swing trading

Any market has two main states: pronounced directional movement up or down (the so-called trend movement) and flat - sideways 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.

According to the swing trading definition, it 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 attractive because, with strict adherence to risk management  rules, the number of loss-making trades to profitable ones is relatively small, and the strategy itself is easy even for a novice trader.

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

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 market’s wave movement, 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.

Principle of swing trading strategy

According to a swing trade definition, the principle of swing trading is the following. 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, you should enter a trade at the time of trend correction. For example, the price rolled back a little in a growing trend and turned towards the main movement again. At this point, it is evident that the price will at least return to the previous level (it is essential 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 the price will reach at least the previous high when the trend continues. We close the position at the first noticeable 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 an exact long downward segment - we do not open a position. We wait for the next reversal and see that the growing trend is weak, so a downward movement has begun. We enter a trade at the upward correction (green dot).

Pros

Benefits of swing trading:

  • Swing trading is universal and provides frequent entry signals. You enter trades on a correction in any direction. You make profits from short-term price swings, opening positions at the peak of the correction. So, it is essential to distinguish between correction and trend reversal.
  • Fast trading result. Swing trading is a short-term trading strategy whose efficiency is evident in a few hours. It is also an advantage from a physiological point of view. If a trader sees an error already in a few minutes, he/she can quickly close a losing position and open a new one.
  • There are no swap costs. Swap is holding an open position over the night.

Cons

The disadvantages of swing trading:

  • Relatively low profitability in points of one trade. A swing trader enters the market on pullbacks at the best price and closes the trade at the next reversal. One movement on average is 5-15 pips, depending on the timeframe, while in intraday strategies within the average volatility, you can take profit of more than 20 pips. Only scalping has a lower profitability.
  • You need to understand the regularities of market movements, constantly monitor the news to successfully employ a swing trade strategy.
  • The local corrections can occur because of fundamental factors or the influence of the institutional investors, market makers. A trader must understand the reason for the current price movement. So you must always track the news and have some kind of intuition and flexibility to quickly adjust your trading decisions.
  • Psychological stress. A trader must identify the trend, constantly look for the best entry points and exit the trades on time. When you are in front of your computer all the time, you could feel tired, lose your focus and suffer from emotional stress.

Swing trading patterns

1. Below, I will define swing trading patterns most actively traded:

Hammer and Inverted Hammer with a pin bar. This pattern means a soon end of the correction. A descending correction ends with a pin bar – a candlestick with a short body and a long lower tail.

A pin bar means that bears in the current time period tried to press the price down, but by the end of the period, the closing price price almost returned to the previous level - the bears were not strong enough. A strengthening signal is when the pin bar has a green candlestick body in a downward correction, and a red one in an upward correction.

The presence of a long tail is not always necessary. If each subsequent candlestick has a smaller body, it means that the correction is exhausting. At the next reversal, you can enter a trade in the trend direction.

Example:

You see from the screenshot, in a downtrend, all corrections end with a candlestick that has a relatively small body and long tail. However, you should not rely only on patterns. Add indicators, draw strong support/resistance levels on the chart.

2. Swing Failure Pattern. This is considered to be one of the most significant swing trading patterns, as it almost always works out. However, it is quite difficult to spot such a pattern, it rarely occurs in its classical form. The pattern was discovered by Tom Dante, who called this candlestick pattern a false breakout of the High or Low of the previous swing.

Schematically, a swing failure pattern looks like this:

There is a main downtrend, where a correction is developing. Point “1” is a swing high; it is the highest point of the correction, following which, you can enter short positions expecting the downtrend to continue. At the same level, you set:

  • Stop Loss orders for short positions in case the price reverses and goes up.
  • Pending Buy Stop orders for those, who bets on a price rise.

Large traders are interested in the aggregated liquidity. Market makers try to enter one trade of a large volume so that the asset price won’t be affected. They see where the orders are accumulated and the Depth of Market, and so large traders wait for the next swing high, which breaks through the previous resistance level and open a mirror trade.

At point “2”, the stop losses for short trades have already worked out, bulls Buy Stop orders have been satisfied, and market makers can push the price deeper in the downtrend. At point “3”, a trader enters a short trade according to the pattern.

Conditions for a Swing Failure Pattern to form:

  • Timeframe is H1. This is not an obligatory condition, but the theory recommends using the hourly chart.
  • The pattern should be preceded by the trend.
  • A false breakout should be preceded by a clear correction. You should clearly spot a swing high and swing low.

If the second correction doesn’t continue and closes a little further than the first swing low, an opposite candlestick appears, open a position in the main trend direction.

Example:

There is an uptrend in Forex, which is followed by a correction. A swing low is formed at point “1”. The correction is explicit, and it forms a triangle with an upward trend.

At point “2”, there forms a Swing Failure candlestick pattern, the tail closes below the previous low. The next candlestick is rising, and so, I open a long position at point “3”.

Although it is a rare instance, bears again try to break out the support level at point “4”. I open another long at point “5”.

Swing trading rules

The rules of swing trading strategy are as follows:

1. The goal of the swing trading strategy is to open a few trades and keep them in the market for the longest possible time. From the point of view of the risk minimization in the previous example, it makes sense to exit 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 ensuring it at the breakeven point.

2. Trading is carried out in 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  note. The price can be influenced by market makers who know at what level most individual 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 a trailing stop (if you have a stable connection with the broker server). Or we set stop orders 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 potential at minimum cost.

One of the difficulties of swing trading is the need for constant monitoring of the chart  and emotional 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. So that, you can anticipate future results.

Some sources recommend linking 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]1.
  • 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.
  • 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 line and to open positions on a reversal movement inside the channel.

Best stocks to swing trade

Any stocks included in stock indexes are suitable for swing trading. In most cases, stocks positively correlate with stock indexes, so you can refer to indices as a signal tool. Another benefit of swing  trading stocks is that it is quite simple to trade stocks on fundamental analysis. The equities are quite responsive to the financial data releases, industrial reports, economic performance data.

Example of a swing trading stock strategy using pyramiding:

Pyramiding is also called a method of scaling up your deposit. It suggests entering multiple trades in the trend, increasing the total position of swing trades stocks, and so, increasing the profit in a favorable scenario. THe above figure displays an example of how to swing trade stocks

Here, the swing trading strategy works in the following way:

  1. Spot the beginning of a new trend in the hourly timeframe. As you see from the screenshot, there is a pin bar after a series of rising candlesticks. This pin bar signals the trend reversal, which can be confirmed by oscillators, for example the [MACD][2].
  2. The trend goes down, and the first correction starts. At the moment of the correction beginning, we protect the trade with a trailing stop at the breakeven level – open level + spread. If the correction will turn into an uptrend, the trade will be exited without a loss.
  3. At point “1”, the price turns down, confirming that the price growth was just a correction. We enter another short trade. At the beginning of the second correction, we again protect the trade with a trailing stop at the opening level + spread.
  4. At points “2”, “3”, “4” we repeat the same actions. After the downtrend reverses up, all positions are closed with a trailing stop. All trades are winning, except for the last one.

The pyramiding swing trading strategy has several advantages:

  • You can trade it in any market.
  • It optimizes risks. If you spotted the beginning of the trend and the start of the first correction, you managed to set a trailing stop at the breakeven level, the only thing you can lose is time. If the second open trade turns out to be unprofitable before setting the trailing stop, the loss will be covered by the profit from the first trade.
  • You do not have to analyze each candlestick. Your positions are already hedged with the trailing stop and the profit from the first position. So, you can trust your gut feeling and follow the actions of the majority.
  • You take the maximum profit from the trend.

An important note. You should enter trades with a total volume that wouldn’t destroy your deposit. Otherwise, the last losing trade stopped out will eliminate the result of the profitable ones.

Best indicators for swing trading

Best indicators and technical tools for swing trading.

  • Fibonacci retracements. The retracement levels in a clear trend. There is an interesting paradox with this instrument. According to the theory, these levels indicate the likely pivot points for the price in a correction.

Therefore, at these levels, most traders place pending and market orders or stops. But the price just changes its direction due to the accumulation of orders. What is the cause and what is the effect?

You can learn more about Fibonacci retracements in the article [What is Fibonacci retracement? How to trade using this indicator?][3]

  • ADX. The indicator perfectly shows the strength and direction of price movement. If at the beginning of the correction with each subsequent candle, the ADX shows a strengthening of the trend, even a hint at a return to the main movement may turn out to be false - you should not open a position, because the correction may be the beginning of a new trend. For more information on how the ADX works and how to use it to develop trading strategies, read [the review ADX Indicator: Average Directional Index][4].

  • Oscillators: Stochastic, RSI, CCI. They show the overbought and oversold zones. You can use oscillators’ signals in the following way. There is an uptrend, and a correction begins, at the bottom of which an upward candle appears.

According to [Price Action][5], this is a signal of the uptrend continuation, so it is relevant to open a long position.

But if the oscillators at this moment are in the overbought zone, it is better to avoid entering trades.

You can learn more about oscillators in the [articles Relative Strength Index - RSI Indicator, Stochastic Oscillator]6. Guide for Using Indicator in Forex Trading.

  • Elliott wave analysis. According to Elliott wave theory, the market is following waves, which have a peak, a bottom, and stages of growth and decline. Elliott Wave Analysis tools are used for preliminary analysis on daily timeframes - they help to understand at what stage the market is at the current moment and in which direction it can move further.

Elliott wave analysis tools are not provided in the MT4. There are two Elliott wave indicators in the MT5, impulse and corrective Elliott waves. In the LiteForex trading terminal, there are four wave analysis tools.

  • Volume indicators. These tools define the reference levels, which traders are likely to put orders at. Volume indicators also help you identify swing highs and swing lows, and estimate the trend strength.

I will be glad if you suggest more tools for swing trading.

There are no best Forex indicators suitable for all investors. There could be profitable trading strategies with optimal parameters, tools and maximum yield. So, if you can recommend any other tools for swing trading, share your ideas in the comments.

Moving averages for swing trading

Moving averages can be used as a primary tool in a trading system, and it is one of the most popular swing trade strategies. The MA trading principle is as follows. Spot a likely correction end in long timeframes, switch to shorter timeframes and enter a trade in the trend direction.

Input parameters for swing trading:

  • In a daily timeframe, set the chart of the [EURUSD][7] currency pair and two MAs, the fast moving average - SMA (10) and a slow one - SMA (30). First, the MAs should cross. If a fast MA is above the slow one, consider a long trade. If the fast MA is below the slow one, enter a short trade.
  • Look for an entry point. You open a position at the end of the price corrective movement. The entry signal is when the price enters the zone between the MAs and the candlestick closes within the zone. The next candlestick should indicate the price reversal.
  • If the next candlestick within the MA range continues the correctional movement, wait for the appearance of the first reversal candlestick. If the corrective movement goes beyond the range, you can consider the beginning of a new trend.
  • Once the previous conditions are fulfilled in the daily timeframe, switch to the H1 or H4 timeframe,e and expect any signal confirming the price reversal.

Example 1:

There is an uptrend in a daily timeframe. The orange SMA is a fast MA, the blue one is slow. At point ‘1’, there is the first correction – the candlestick enters the range between the MAs, but it closes at the border. The signal is weak, so we ignore it.

The downward corrective price movement continues, four red candlesticks close within the range. There appears a green candlestick; we switch to the H1 timeframe at point ‘2’ and look for a buy entry. A similar situation occurs at point ‘3’ - following a downward movement, a green candlestick in the main trend direction appears.

The green candlestick corresponds to the date 06/22/2020. We switch to the H1 timeframe. At 03:00, there appears a candlestick similar to the pin bar pattern - a reversal signal. It has a small body compared to the previous bars and a long lower shadow.

We can open a long position after the several consecutive ascending candles appear. To make sure, we can draw a resistance level and wait for its breakout.

Advice. If you do not want to sit in front of the monitor waiting for the signal candlestick, you can use alerts. Set a sound alert in the MT4, and it will inform you when the price reaches the resistance level.

The green candlestick corresponds to the date of 08/11/2020. We switch to the H1 timeframe. At 05.00, an Engulfing pattern appears in the downtrend - the body of the green candlestick completely overlaps the body of the red one. We can enter a trade at the next candlestick or wait for the price to cross the resistance level.

The conditions to exit the trade are individual and depend on your risk management strategy. You can exit according to reversal patterns or when the price reaches the profit target. You can track the candlesticks in the daily timeframe and wait through the local corrections in the H1 chart.

Example 2:

There is a strong uptrend on the daily timeframe. In the price range marked with the red box, the candlestick closes between two Moving Averages. But the next candlestick continues the downward movement.

It means that there is likely to be the beginning of the new trend, rather than a deep correction. We can’t enter a long trade. WE can either avoid trading, or look for sell signals in the H1 timeframe.

This variant of the forex swing trading strategy is profitable. However, there is one drawback, you could wait for a good signal to buy or sell for several weeks. Therefore, you can employ swing trading to multiple currency pairs simultaneously.

Best time frame for swing trading

The best time frame for swing trading is H1 and longer. The problem of shorter timeframes of M1-M15 is the market noise. The trader should spot the moment of the correction reversal and enter a trade when the main trend resumes.

However, the market noise brings imbalance into the price movement. Over a short distance, the price may go along with the trend and reverse, so it is impossible to make an accurate analysis.

Another problem of short timeframes. You should test any trading strategy on the historical data before you launch it on the real account. If, when uploading the history of quotes, some data are missed in some places, as is often the case with minute intervals, the test results will not correspond to reality.

The timeframes of H1and longer are good for swing trading for the following reasons:

  • There is no price noise. Weak influence of fundamental analysis.
  • You can take the maximum profit from the trend. You can hold the position in the market for a few hours or a few days. For long-term trading, where the trend is clear and steady, you need long timeframes.
  • The emotional stress is less. It is enough to check the positions opened in an hourly timeframe once or twice an hour. The shorter is the timeframe, the more often you should check the chart.
  • The profitability of the same trading strategy is better in a longer timeframe. Example: you open a position in Forex at the end of the correction and set the take profit at the level of its beginning. If the main trend continues, the price can return to it in 3-6 candlesticks depending on the depth of the correction.
  • On the M15 timeframe, the average candlestick body length is 30-40 pips in 5-digit quotes. In the H1 timeframe, it is 70-100 pips.

The hourly and daily timeframes have one drawback, entry signals appear quite rarely compared to the timeframes of М15-М30. Therefore, select the timeframe convenient for you.

Day Trading vs. Swing Trading

The main difference between swing trading and day trading strategies is in the holding time of open positions. Intraday strategies suggest you close the positions within the same trading day. The trader can use any timeframe from M1 to H4, but the trade should be exited before the end of the trading day. It is done so that you won’t pay for the swap, which is a fee for transferring the position to the next trading day.

Swing trading doesn’t imply any time limits for holding up an open position. It is based on the correction depth and the trend duration. So you can hold your position open for several hours or for a few days.

Other differences between swing trading and day trading strategies:

  • Trading principle. Swing trading aims at making profits on the price swings – short-term corrections. You can trade both with the trend and counter the trend. In rare cases, swing trading strategies work in the consolidation range.
  • The variety of day trading strategies is much wider.
  • Tools. Swing traders prefer predictable markets, so they try to avoid entering trades during the moments of fundamental volatility. Day traders often use fundamental analysis.
  • The number of positions opened. Day traders can hold a position for the whole day, almost without any control, thus saving up the time. Swing traders making profits from local correction, have to spend more time in front of the computer. Swing traders often enter several trades on multiple assets.
  • Risk management. Swing traders prefer to work out a straight section of the price movement, exiting the trade amid the first reversal signals. Day traders can hold the position for a long time, expecting a deep drawdown to end.

Both trading approaches have their pros and cons, they also have much in common. Test different trading styles on a [demo account][8] to find out what is suitable for you. Demo accounts and LiteForex trading terminal are available without registration.

Best Swing Trading strategies

Swing trading strategies can be grouped according to the trend movement.

1. Trading with the trend. There are two variants:

In this example, the trader makes profit from the main downtrend, selling the asset at the highest price at the moment when the upward correction ends. The trades are exited at a lower price, and the trader stays outside the market during a short-term price rise.

The trend is up. The trader enters a long position at point “1” and exits it at point “2”. At point “3”, the trader again opens a long position expecting the uptrend to continue; but the price fails to reach the most recent swing high and turns down at point “4”. The section “3-4” turns from the trend into the correction in the new downtrend.

To avoid such a situation, you can place a Buy Stop pending order at the level of the previous swing high in the correction area. If the price does not reach it and goes down, you will not lose anything, since the position hasn’t been open.

If the price has drawn the second top, the uptrend is likely to continue. And although with such a strategy you lose part of the profit, since the trade is opened not at the bottom of the correction, but at the level of the last swing high, you reduce the risk of loss.

2. Trading against the trend. It is the opposite approach. The counter trend trading strategy suggests you make profit from the correction.

You enter a trade when the correction begins and exit when the price movement turns in the direction of the major trend. If the correction turns into a trend, you will make a double profit.

Bull Strategies

Any bull strategy suggests trading in an uptrend. According to swing trading meaning, swing trading is equally efficient in the market trend in any direction. But there is an opinion that the bull market is more stable as the buyers are willing to buy an asset whose price is growing. Bulls prefer to pick up the price rise and avoid trading when the prices are falling.

Bullish trading strategies can be short-term and long-term. Short-term ones imply earnings on each local pullback and subsequent growth. The retracement depth is 3-6 candles.

The advantage of this strategy is the relatively higher earnings, since the trader manages to close the position at the moment when the bearish correction begins after a bullish swing. The drawback, you need to check the chart more often. Long-term strategy also implies trend trading, but on global corrections, local corrections are ignored.

Example of a swing trade system:

A short-term swing-trader picks up the maximum profit in the uptrend from each correction. In the H1 timeframe, the positions are being held for a few hours.

A long-term swing trader prefers to save up the time missing local correction and making profits from the global trend. The trades are held from twelve hours to several days. ****

Bear Strategies

A bear strategy implies trading in a downtrend. The bearish position is opened in swing highs, each of them lower than the previous one. Everything is similar to bull strategies, only the trend should be down.

I want to again emphasize that the examples of bull and bear trading strategies are just the variations of swing trading. Swing trading is based on the price fluctuations in both directions. It doesn’t matter whether the price fluctuates while trending or going sideways. The difference is that the price movements in the trend are longer, in trading flat, the price swings are short and shallow.

How to identify swing high and swing low

Swing high and swing low are local extreme points of the correction and the main trend:

The red lines mark swing highs, blue lines highlight swing lows. It is more difficult to define the extreme points in the real chart, as they are not always explicit. For example, a slight price decline in the uptrend could be flat.

Features of swing highs and swing lows:

  • They appear in a trending market. The swings are relatively short compared to the trend length.
  • They have clear borders formed with two or three candlestick, not more.
  • Each following swing extreme is further than the previous one.

It is easier to spot the beginning and the end of the correction in the linear chart. In the candlestick charts, the extreme points are defined by the highest/lowest of the shadows.ей.

How to swing trade crypto

The cryptocurrency market differs from other markets by high volatility. In one day, the average range of price swings can be 3%-5%, in some days – 10%-15%.

The peculiarities of cryptocurrency swing trading:

  • Frequent and deep corrections.
  • You can trade both in a trending and flat market.
  • The trend direction frequently changes. You can estimate the volatility using the ATR indicator.
  • A significant influence of fundamental factors and large capitals. That is why, most technical indicators fail. The major technical tools to swing trade cryptocurrencies are graphic analysis, Price Action patterns, volume indicators.
  • Wide spread. So, it makes sense to pick up only deep corrections and ignore the local ones, holding the positions open for a few days.
  • Strict adherence to the risk management rules in terms of the ratio of the deposit and open positions. The open position should withstand local drawdowns.

Considering the above features, one can trade cryptocurrencies using the same trading strategies as for other assets.

Forex Swing Trading

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 for forex currency pairs.

Input parameters:

  • Currency pair - EURUSD.
  • Time frame - Н1.
  • Supplementary tool - 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 timeframe, we look for the latest trend to spot its reversal and start opening positions. 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 at the green point.

  1. Three extreme points allow us 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 breakout occurs at the point indicated by the blue arrow. At this point, the stochastic shows an uptrend, being around level 50. 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 boxes 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.

A few comments on the chart:

  • Exit points are not marked in the chart. Each trader decides themselves which strategy to build: try to make as much profit as you can from the trend or close the position at the first reversal. If you choose the second option, close the position either after the first two consecutive reversal candles or after the first reversal candle if its body is larger than the previous one.
  • In the first box (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 (the third 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 fourth zone. There is almost no correction and the trend movement is chaotic.
  • Watch the Stochastic. The main signal is when both of its lines coincide with the price movement direction. Its presence in overbought and oversold areas is an amplifying signal, but not the main signal.
  • You can build levels based on the first extreme points. But do not forget about the need to change the scale to see the big picture.

Swing trade charts

To swing trade, you can use any price chart suitable for your trading system. Each chart has its pros:

  • Line charts. It is convenient in visual terms. It clearly displays the trend and pivot points, and you can easily draw support and resistance levels. It is also preferable to build the Fibonacci retracements in a line chart.
  • Japanese Candlesticks. In comparison with the line chart, it provides more information for the analysis, it is convenient to analyze the price movements within the timeframe using candlestick charts.
  • Heiken Ashi. It is a variation of the candlestick chart, which uses another approach to calculate the candlestick prices. You can learn more about different types of [Forex price charts in the overview Forex charts: Ultimate Guide for Beginners][9].

You can combine different charts for a more profound analysis.

Risk management

Recommendations on risk management for swing traders:

  • Use the scaling method. It provides for an increase in the volume of open positions if the price goes in the right direction, and a decrease in volume if the price goes in the opposite direction to the forecast.
  • Observe the rule for the risk/profit ratio. In theory, take profit should be equal to three distances to stop loss. You can change this ratio in accordance with your strategy and goals. But try to stick strictly to the action plan.
  • Stick to common risk management rules concerning the risk per trade and total risk. For example, the risk per trade is 5% of the deposit. The risk level depends on the relation between the trade volume and the stop loss length. You can read more about the trade volume in different markets in the article [What is a lot size and how to calculate a lot in Forex][10]
  • Be flexible. If the price goes in an unwanted direction, and you have reasons to doubt your forecast, don’t hesitate to exit the trade with a loss without waiting for the stop loss to work out.
  • Check your strategy efficiency in the MT4 strategy tester. If, on a real account, your strategy performs much worse than on backtesting, stop trading and search for reasons.
  • Control your emotions. Swing trading strategies suite those who are patient and are not prone to panic. You will succeed in swing trading if you can watch drawdowns without emotions and you do not close positions too early. You should not also be an aggressive trader or aim at multiplying your deposit in a short time.

Conclusion

Swing trading is suitable for a beginner and fits the rule to trade with the trend. If you spot a strong trend you can make as much profit from one trade as possible. 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][11]. 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][12] your trading account.
  • Telegram chat for traders: . We are sharing the signals and trading experience
  • Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders

Price chart of EURUSD in real time mode

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/what-is-divergence-on-forex/
  2. www.liteforex.com/blog/for-beginners/best-technical-indicators/macd-indicator-forex-trading/
  3. www.liteforex.com/blog/for-beginners/best-technical-indicators/fibonacci-retracement/
  4. www.liteforex.com/blog/for-beginners/best-technical-indicators/adx-indicator-average-directional-index/
  5. www.liteforex.com/blog/for-beginners/price-action-forex-strategies/
  6. www.liteforex.com/blog/for-beginners/best-technical-indicators/rsi-relative-strength-index/
  7. my.liteforex.com/trading/chart?symbol=EURUSD
  8. my.liteforex.com/
  9. www.liteforex.com/blog/for-beginners/types-of-forex-charts/heikin-ashi-candles/
  10. www.liteforex.com/blog/for-beginners/how-to-calculate-a-lot-on-forex/
  11. my.liteforex.com/?category=for-beginners&slug=swing-trading-strategies&openPopup=%2Fregistration%2Fpopup&utm_source=blog&utm_medium=article&utm_campaign=bonus
  12. my.liteforex.com/deposit/?category=for-beginners&slug=swing-trading-strategies&promo_code=BLOG&utm_source=blog&utm_medium=article&utm_campaign=bonus