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swing trading strategies and tactics

Swing Trading Strategy

I wish I could tell you that swing trading is a fast and easy way that leads to overnight profits and your first million. All the training courses and books promote the idea of successful swing trading that leads traders to riches: “I’ve tried this swing trading technique and made more than $5, 000 on one trade alone!”

However, the reality is slightly different. Swing trading isn’t going to lead to overnight wealth. Period. Anyone who is telling you otherwise is either lying or has made an incredibly risky but lucky trade. At best, as a novice swing trader, you’ll produce market returns in line or slightly above the overall market. We agree with Scott who posted on Quora:

I can tell you from first-hand experience as well as actual stats on how other Swing Traders perform that the vast majority will underperfrom the underlying stock index(es) at best and lose large amounts at worst

In this blog post we will introduce you to the swing trading itself, swing strategies and techniques without hyperbolizing potential returns. But let’s start from the very beginning:

 

1. What is SWING trading?

 

So what the hell is swing trading? Simply put, swing trading is a style of trading that attempts to profit from securities’ short-term price movements spanning a few days to a few weeks. Swing traders focus on taking smaller but more frequent gains and cutting losses as quickly as possible. This trading style is purely based on assumptions that market prices rarely move in a straight line and that traders can profit from entering and exiting trades at these swings.

Swing traders wait for low-risk opportunities and attempt to take a share of a significant market’s move up or down. When an overall market is riding high, they go long (buy) more often than they go short (sell). When the overall market is weak, they go short (sell) more often than they go long (buy). If there are no significant market movements, swing traders usually don’t trade and wait for new opportunities to arise.

 

swing trading strategy example

2. How to swing trade?

 

Swing trader utilizes technical and fundamental analysis, price trends, and patterns to find trading opportunities. Typically, swing trading involves holding a position, either long or short, for more than one trading session but usually no longer than several weeks. Swing trades can also occur during a trading session, though this is rare outcome that is brought about by extremely volatile conditions.

Swing trading strategies often look for arising opportunities on the daily charts, which we will be discussing later in this article, and may watch 1-hour or 15-minute charts to find a precise entry, stop loss, and take advantage of market swings.

Ultimately, each swing trader devises a plan and strategy that gives them an edge over other traders. However, even for the best swing strategy, it is impossible to work every time, so favourable risk/reward must produce an overall profit over a longer period of time.

Many swing traders assess trades on a risk/reward basis. For instance, profit factor of $3 is considered a favourable risk/reward, while risking $1 to only make $0.75 might be considered as not favourable risk/reward. To anticipate potential profits, traders analyze various charts and then predict when is the best time to enter and where to place a stop loss.

To illustrate how swing trading works in real life, we’ve borrowed the following example from Investopedia:

 

Real-World Example of Swing Trade in Apple

real world swing trading strategy example apple stock

A real-world example of potential AAPL swing trading opportunities

 

The chart above shows a period where Apple (AAPL) experienced a strong trend. This was followed by a small cup and handle pattern which often signals a continuation of the price rise if the stock moves above the high of the handle.

In this case:

  • The price does rise above the handle, triggering a possible buy near $192.70.
  • One possible place to put a stop loss is below the handle, marked by the rectangle, near $187.50.
  • Based on the entry and stop loss, the estimated risk for the trade is $5.20 per share ($192.70 – $187.50).
  • If looking for a potential reward that is at least twice the risk, any price above $203.10 ($192.70 +(2 *$5.20)) will provide this.

Aside from a risk/reward, the trader could also utilize other exit methods, such as waiting for the price to make a new low. With this method, an exit signal wasn’t given until $216.46, when the price dropped below the prior pullback low. This method would have resulted in a profit of $23.76 per share. Thought of another way – a 12% profit in exchange for less than 3% risk. This swing trade took approximately two months.

 

greatest investor

3. Swing Trading vs Day Trading vs Buy-and-Hold

 

Swing trading is different from day trading or buy-and-hold investing. Those type of investors differ in market approach, trading frequencies and data sources. It is very important to understand the difference between these trading types to focus on aspects that are only relevant to swing trading. However, neither strategy is better than the other, traders should choose the approach that best suits their skills, risk level and preferences.

Contentwdt_IDSwing TradingDay TradingPositions Trading

Swing Trading vs Buy-And-Hold Investing

 

Buy-and-hold is a passive investment in which an investor buys asset and holds it for a long period regardless of fluctuations in the market. Buy-and-hold investors identify potential increase in asset’s price and hold its ownership for a period of time. In fact, buy-and-hold investors keep shares through bull and bear markets. Many legendary investors such as Warren Buffett and Jack Bogle praise this investing approach as ideal for individuals seeking healthy long-term returns. However, the majority of investors are affected by trading psychology and cannot take rational decisions in volatile markets. Thus, buy-and-hold portfolio tend to have a turnover rate below 20 percent.

Buy-and-hold strategy is not as time-intensive as swing trading and most of the times not so risky and difficult. However, swing trading has a few advantages over buy-and-hold strategy:

  • Income stream: Buy-and-hold investors focus on long-term investments that might generate profits after a long period of time. Swing trading, on the other hand, might lead to instant profits (as well as instant losses).
  • Diversified risk: Swing traders can hold a few securities across asset classes or sectors and generate higher profits than those who invest passively.
  • Shorting possibility: Swing trading allows to profit from price declines and excessive euphoria through shorting, which buy-and-hold investors simply cannot replicate. The essence of shorting is that it allows traders to profit from price declines as opposed to price increases. However, shorting involves excessive risks which, theoretically, are unlimited but the potential profits are limited to the amount traders short.

 

Swing Trading vs Day Trading

 

While day trading strategy can take place on several occasions in a single day, swing trading is based on identifying swings that take place over a period of days.

Day trading is better suited for individuals who are passionate about trading full time and have an advanced understanding of technical analysis and charting. Therefore, day trading might be very stressful and intense, so trading decisions are often affected by trader psychology. However, day trading might work just perfectly with algorithmic trading systems that allow avoiding the downside. If you are curious to learn more, we’ve prepared an ultimate guide about algorithmic trading using day trading strategies.

Swing trading, on the other hand, does not require such a formidable set of traits and full-time attention. Because of the longer time frame, which may take days to weeks as opposed to minutes to hours, a swing trader does not need to monitor trades full-time and take decisions so fast.

  • Risk and Profits: Although, swing trading might result in higher profits than day trading, as the position is open for a longer period of time. However, positions held overnight also suffer from an increase in overnight margin requirements. Maximum leverage is usually two times one’s capital. Compared to day trading, in which margins are four times one’s capital. What is more, swing trading might result in substantial losses, as the positions are held longer compared to day trading.
  • Technical requirements: Swing trading can be done with just one computer and conventional trading tools. It does not require state-of-art technology as day traders use.
  • Price movements: Day trading has the advantage of riding security price movements that can be quite volatile. This requires time-intensive devotion on their part. Near-term price movements can be driven by a major seller or buyer in the market and not by a company’s fundamentals.

 

swing trading vs day trading infographics

 

4. Chart Indicators for Swing Traders

Moving averages

Moving averages calculate the mean of a market’s price movements over a given period. Moving averages are an important factor in determining support and resistance levels. They can also help you to determine the current market climate.

However, the moving average is referred to as a lagging indicator because it looks back over past price action. The longer the period covered by the moving average, the more it lags. Moving averages are categorized as short, medium, and long term. It depends on how many periods are analyzed: 5- to 50-period is considered short-term, 50- to 100-period is medium-term, and 100- to 200-period is long-term.

200 day moving average body US 500 showing 200 day moving average.png.full

 

Broadly speaking, there are two main types of moving averages: simple moving average and exponential moving average:

  • The simple moving average (SMA): It is an arithmetic moving average calculated by adding recent prices and then dividing the sum by the number of time periods in the calculation average. SMA is usually used to determine the current direction of the market. The simple moving average might also act as support and resistance levels, which can help to decide where and when to enter and exit the trade.
  • The exponential moving average (EMA): It is a technical chart indicator that tracks the price of an investment over time. However, more weight is placed on recent data to more closely match the current market sentiment. Once again, it might serve as support and resistance to determine entry and exit.
One of the most common ways that swing traders employ moving average indicators is to watch for when a market's short-term moving average crosses a longer-term moving average.

Advantages and Limitation of Moving Averages

Can be used measuring the trend of any series

Applicable to linear as well as non-linear trends

The trend cannot be extended for forecasting future values

Not applicable to short time series

Trend values are not available for some periods at the start and some values at the end of time series

Bollinger Bands

Bollinger Bands are widely known technical indicator for swing trading as it indicates the probable turnaround in prices. Bollinger bands are defined by a set of trendlines plotted two standard deviations (positively and negatively) away from a simple moving average of a security’s price, but which can be adjusted to user preferences. Sounds a bit complicated, huh?

But let me simplify this: Bollinger bands are type of statistical chart characterizing the prices and volatility over time of a financial instrument. It consists of three curves which are drawn with the help of moving average and standard deviations. The middle band is a moving average of a definite period, whereas the upper and lower bands are standard deviations of the middle line. However, it might be quite complicated to understand how to calculate Bollinger bands at first but let me assurre you that it is not so hard as it might sound.

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How to calculate Bollinger Bands

To calculate Bollinger bands first you need to compute the simple moving average of the security. Next, the standard deviation of the security’s price will be obtained. Standard deviation is a mathematical measurement of average variance and features prominently in statistics, economics, accounting, and finance. Standard deviation can be calculated by taking the square root of the variance, which itself is the average of the squared differences of the mean. Finally, multiply that standard deviation value by two and both add and subtract that amount from each point along with the simple moving average. Those produce the upper and lower bands.

Bollinger Bands can also be calculated in excel which makes it so much easier. Check this YouTube video to find out how to calculate Bollinger Bands in excel. If you are still keen to do it yourself, here is the formula:

Bollinger Bands Formula

BOLU = MA(TP,n)+mσ[TP,n]
BOLD=MA(TP,n)mσ[TP,n]

BOLU = Upper Bollinger Band
BOLD = Lower Bollinger Band
MA = Moving average
TP (typical price) = (High+Low+Close) ÷ 3
n = Number of days in smoothing period (typically 20)
m = Number of standard deviations (typically 2)
σ [TP,n] = Standard Deviation over last n periods of TP

The closer the prices move to the upper band, the more overbought the market, and the closer the prices move to the lower band, the more oversold the market.

Advantages and Limitation of Bollinger Bands

Very simple trading tool widely used by professional and at-home traders

Using only the bands to trade is a risky strategy since the indicator focuses on price and volatility while ignoring a lot of other relevant information

Because Bollinger bands are computed from a simple moving average, they weight older price data the same as the most recent, meaning that new information may be diluted by outdated data.

RSI (Relative Strength Index)

Relative Strength Index, also known as RSI, is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of an asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100.

Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.

RSI is computed with a two-part calculation. If you are interested to learn how to calculate RSI, Investopedia has provided a clear explanation of how to do so.

rsi for swing trading

An asset is usually considered overbought when the RSI is above 70% and oversold when it is below 30%.

Advantages and Limitation of RSI

Easy to implement and understand

Can be used to find the loss of momentum

Helps in finding key reversal levels

Because Bollinger bands are computed from a simple moving average, they weight older price data the same as the most recent, meaning that new information may be diluted by outdated data

Since the indicator displays momentum, it can stay overbought or oversold for a long time when an asset has significant momentum in either direction

Float

The float is the number of shares that are available for public trading. It is very easy to calculate the float – just take a company’s outstanding shares and subtract any restricted stock. It’s also worth mentioning that there is an inverse correlation between the size of company’s float and the volatility of stock’s price.

Are you curious how you can use float indicator in trading? Stock’s float can be influential in helping you decide whether a trade is worth taking. For instance, a smaller supply of shares is more likely to make a bigger move, while it is harder to see a bigger move for an excessive float of shares.

There is an inverse correlation between the size of the company's float and the volatility of stock's price.

Short Interest

Short interest is a ratio that compares the number of floating shares to the number of shares short. For instance, a stock with 2.5 million shares sold short, and 10 million shares outstanding has a short interest of 25%. The short interest can be checked on monthly reports issued by exchanges. These reports are great for traders because they allow people to gauge the overall market sentiment surrounding a particular stock by showing what short-sellers are doing.

High short interest is an indication that the market is trending bearish with this stock. However, high short interest and an upward trend is a sign that a short squeeze is possible.

5. Swing Trading Patterns

 

Although, there are many chart patterns that can help swing traders to identify potential opportunities, some of the more common patterns involve moving average crossovers, cup-and-handle patterns, head and shoulders patterns, flags, and triangles. As mentioned before, we will not go into the details of technical analysis but rather we will familiarize you with basics and provide the starting point.

Bull Flag Pattern

Let’s start from the very beginning – what is the bull flag pattern and how does it work?

A bull flag is a continuation chart pattern that signals the market is likely to move higher. To spot the bull flag pattern, look for a strong trending move higher. After a strong move higher, you might expect a Bull Flag to form as the market does a pullback. The pullback should consist of smaller range candles (compared to the earlier move). The “tighter” the range, the likely the market will breakdown higher. If you are curious to learn more about bull flag and bear flag chart patterns, IG team has prepared an article on how to recognize and trade these well-known patterns in technical analysis.

 

Bull Flag Pattern

Bull flag pattern features:

- Asset has made a strong move up on high relative volume, forming the pole
- Asset consolidates near the top of the pole on lighter volume, forming the flag
- Asset breaks out of consolidation pattern on high relative volume to continue the trend

Advantages and Limitation of the Bull Flag Pattern

Works in all financial markets

Pattern helps determine entry and limit levels

Good risk-reward ratio

Can be complex for novice traders

Bear Flag Pattern

The counterpart of a bull flag is a bear flag. This pattern is the inverse of the bull flag. Simply speaking, a bear flag pattern can be identified when there is a strong drop in price on large volume. That’s followed by a small peak and consolidation on low volume. Once large volume comes back and starts pushing the asset further down, that could be the time to short sell.

 

Bear Flag Pattern

Bear flag pattern features:

- Asset has made a strong move down
- Market does a pullback
- The pullback consists of smaller range candles (compared to the earlier move)

Advantages and Limitation of the Bear Flag Pattern

Can be applied to all financial markets

The pattern helps determine entry, stop and limit levels

Good risk-reward ratio

Multifaceted pattern which can be difficult for novice traders

 

6. Swing Trading Strategies To Start With

 

In this blog article, we will not get into details about swing trading strategies but rather mention a few worth looking into. There are loads of trading courses and videos that will explain about swing trading strategies, charting, where to place stop losses and many other details. If you are interested in any particular trading strategy, let us know in the comment section and we might prepare the blog article to test if that strategy really works.

 

Trading of Support and Resistance

Support and resistance are essential levels for all traders in swing trading. Before one can start placing orders on the buy/sell side, these key levels will form the battlefield for buying or selling. Simply put, an area of support is where the price of an asset tends to stop falling, and an area of resistance is where the price tends to stop rising. However, this simple definition is not enough to make successful trading decisions. Traders really need more information about support and resistance before they attempt to make any kind of decisions based on those areas in a chart. As in this article, we will not provide in-depth explanations, we recommend to read this blog post prepared by the Balance team if you are interested in learning more about the trading of support and resistance.

1.support and resistance levels 600x387 1

The basic trading method for using support and resistance is to buy near support in uptrends or the parts of ranges or chart patterns where prices are moving up and to sell/sell short near resistance in downtrends or the parts of ranges and chart patterns where prices are moving down.

Fibonacci

The Fibonacci retracements pattern can be useful for swing traders to identify reversals on a chart. Fibonacci numbers were developed by Leonardo Fibonacci and it is simply a series of numbers that when you add the previous two numbers you come up with the next number in the sequence.

Fibonacci is widely used by swing traders in identifying when retracements are happening before making a decisive choice to place a trade. Usually, when prices trend strongly, traders often find themselves getting caught in a dilemma of whether to join the trend or to wait for some price pullbacks. Intuitively, traders know that chasing prices are not recommended. Yet, many traders do not know when price retracements are truly occurring and also if whether these retracements if occurred, are valid to be taken.

 

FibonacciRetracement

 

If you are curious to learn more about Fibonacci, we’ve prepared an article where we outline correct methods to use Fibonacci Extensions to find trend reversal price levels.

Price Channel Trading

The price channel pattern is considered as one of the most intuitive and easiest chart patterns. It is widely used amongst swing traders as well as day traders, who practice the art of technical anaysis. So what is the price channel pattern?

The Price Channel pattern represents two trend lines positioned above (channel resistance) and below (channel support) the price. The price action is contained between these two parallel trendlines. Depending on the direction of the trend, the channel may be termed horizontal, ascending, or descending.

Price channels are quite useful in identifying breakouts, which is when a security’s price breaches either the upper or lower channel trendline. If you are curious to learn more about price channel strategy, we recommend this blog post.

Price Channel Pattern 8 1024x465 1

Moving Average Strategy for Swing Trading

Feeling a bit lost and overwhelmed with all this information? Don’t worry, to make it easier for you to understand, we demonstrate the results of taking a simple moving average strategy and applying it to multiple markets.

Idea: Basic moving average strategy on a daily chart. We are trying to capture daily trends and avoid market crashes.

Rules:

240 minute interval chart
Long only
Close must be greater than simple moving average period 165
Then the simple moving average period 10 crosses the simple moving average period 70 and we go long
Sell when fast moving average closes below slow moving average. However, to avoid some chop the bars since entry have to exceed 5

Code

if marketposition = 0
and close > average(close,165)
and Average(close,10) >= Average(close,70)
then buy this bar close;

if marketposition <> 0 and barssinceentry > 5
and Average(close,10) < Average(close,70)
then sell this bar close;

Tested on 6 markets:

  • ES
  • NQ
  • YM
  • GC (Gold)
  • CL (Crude)
  • SI (Silver)

 

7. Potential Profits of Swing Trading

 

When speaking with swing traders and reading various forums it is not hard to understand that even successful swing traders still need to work another job to fund their lifestyle. There are just a few who can afford to live solely based on their swing trading income. Not to even mention that the large group of trading newbies will fail and will never make any money.

However, most of swing traders who make money reveal that their average yearly results fluctuate in range between 15 to 30%. They were able to make hundreds percent on some individual trades, but their result always tend to finish in this range.

If you are a small trader with an account of less than $20 000, you can experience several years of 50%+ returns. But don’t take it for granted. As your funds grow your ability to make this return regularly will decrease.

Keep in mind that the commission costs also need to be taken into consideration. You can check broker margin requirements here.

Recommended Reading

Which broker has the highest fees? Who offers the highest quality data? Which platform is the best for day traders and beginners?

We demonstrate that taking basic day trading knowledge and creating a logical rule to capture momentum can generate positive returns over the years.

What is algorithmic trading and where you should start? We’ve prepared an ultimate guide about everything you need to know about algorithmic trading and its benefits.

8. Swing Trading Risk Management

 

The most important determinant of whether you’ll be a successful swing trader is how well you manage risk. Even the best traders need to incorporate risk management practises preventing losses from getting out of control. However, even having a strategic and objective approach to cutting losses does not prevent swing traders from losing all their capital. As we can see from the swing traders’ experience, many lose their money and end up quitting trading. Just considering the fact that the average swing trader might risk 50% of their capital on each trade to make 1% or 2% on their winning trades, shows how hard is to make profits as a swing trader. In fact, around 90% of swing traders will lose all their money, so swing traders might be treated more like gamblers than successful investors. If you are looking for consistent profits, we would highly recommend to trust experienced companies rather than start this gambling game. However, if these statistics do not scare you and you would still like to try swing trading, here are some tips that will help you to manage your risks.

Determine Risk Level

How much you should risk on each trade? There is no answer that fits all but you should never risk more than you can afford to lose. Stop losses are one way to help with trading risk management. Setting a stop loss sets a price when you’ll sell trade taking a loss. However, many traders understand the difficulty in setting stops: stops too tight are destined to get hit more often and stops too loose are fated to give the potential colossal loser. It is quite controversial whether stops really help to limit the risks or are they just killing your performance.

Support and resistance also play a huge role in trading risk management. We’ve already touched some points of support and resistance previously, so I will not go into details. However, it is worth mentioning that support levels go hand in hand with a stop loss, meanwhile, resistance is a great profit target.

 

Have a plan before you trade

It is mandatory to plan your trades ahead of time. Planning your trades before the trading sessions helps to limit trading risks and take more rational decisions. Any good trader knows the price they are willing to pay ahead of time as well as the price they are willing to sell at. Although, in theory, many traders believe that they will be able to make logical decisions, in reality, emotions take over. Traders’ psychology of fear and greed can lead to poor decision making and potential losses. However, even the best trading plan cannot prevent the intervention of human emotions. the only way to avoid irrational decisions while trading is to employ an algorithmic trading strategy – humans simply cannot compete with bots.

9. Learning swing trading

 

If you wish to start swing trading, we’ve prepared a list of learning material that might act as a good starting point.

Just keep in mind that none of these resources will teach you how to trade. Every trader must find their own trading system and style. However, it might help to gain a basic understanding, learn terminology, and form the required mindset.

Swing Trading Books:

 

Swing Trading Online Material:

  • YouTube: There are lots of great channels breaking down the process of making a swing trade
  • Trading Forums and Rooms: you can find many valuable advice from current swing traders
  • Courses: It is quite hard to find the course that would be worth its cost. However, there are some free courses you can find in Udemy or Coursera.
  • Blogs: There are dozens of blogs that provide valuable information about swing trading and its terminology. However, most of them are geared towards beginners rather than experienced traders.

* Beware that online material might be misleading and not reliable. As a beginner, you will not be able to judge which information is valuable.

 

10. Why You Should Never Swing Trade

 

Although there are a few successful swing traders that actually earn money, it is estimated that 80-95% of swing traders will lose money. Swing trading requires a great deal of study and practice, along with a strict trading risk management plan and discipline.

When compared to day trading, swing trading requires a longer commitment and adds overnight and weekend risks. Not to even mention a significant learning curve of technical analysis.

However, the biggest barrier to swing trading success is trading psychology. Not many traders can sit down during the drawdown and eventually human emotions take over rational decision making. Unfortunately, this is unavoidable in every human trader career. For many investors, the market’s deranged up and downs cycles which feel like the guys pushing the market are just moving like headless chickens. These erratic sharp short-term market movements create such anxiety which often leads to harmful financial decisions.

However, many traders employ algorithmic trading systems that always count risks and take rational decisions for more consistent profits. Human judgment can often lag behind reality, algorithms provide us with the tools to correct the errors and biases and help us make better decisions. Decisions not based on our dispositions and customs such as habit, tradition, or superstition, but based on data. It’s time to think SMART.

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