Swing Trading Strategies – Ultimate How To Guide
Last updated on March 9th, 2020
Swing trading strategies are designed for people who want to trade but don’t have time to day trade.
This will allow them to profit from the markets, earn extra money, and still maintain their full time job.
These types of strategies are also for day traders who make a living day trading but also look for another way to profit from the markets.
In this article, I am going to cover a lot about swing trading including:
- What swing trading really is (not what many think it is)
- 3 swing trading setups, tactics, and strategies you can start testing today
- Pros and cons of swing trading
I will not cover any “best” swing trading strategies or “best” trading indicators for a technical analysis strategy. There is not and never will be any “best” in trading.
What Is Swing Trading And Why You Need A Strategy
Markets move in waves known as swings in the price of the instrument. No market, for example, will trend up without having some sort of retrace in price.
The better swing trading techniques will attempt to ride either the swing up in price or the swing down in price. It does not matter if they are bullish or bearish swings.
If you are trading against the main direction of the price trend, this is known as counter-trend trading. Some swing trading strategies will have both a trend and counter-trend trading component.
Many people on Youtube and elsewhere will say that swing trading is time frame dependent.
Trading on a four hour or a daily chart does not make you a swing trader.
Swing trading Forex or other markets is exactly as the name implies: trading a swing, either a corrective swing or impulse swing, and exiting before the price goes against you.
You are not looking for a small price increase/decrease but are looking to take advantage of the bigger price moves that most instruments make.
The swings can take place inside of a trend or inside of a price range environment.
Each leg up and down is a potential swing trade.
Why A Swing Trading Strategy Is Needed
It is too easy to just press a buy or sell button when you see price making moves.
That is not what you want to do.
Any of the strategies you will use, in Forex, Futures, any instrument, will have repeatable basic criteria for you to follow:
- What your setup is
- How you will enter – a trade trigger
- Where you will place your protective stop
- How you will take profit from the swing trade
This will be criteria you have tested and will show that price has the greater probability of doing one thing over another.
It will prevent you from buying extreme price movements that could be spelling the end of the impulse price move.
It will help prevent you selling lows from climax moves that are about to reverse the current market direction.
Without a strategy to trade, you will not find any trading success over the long term.
Should You Swing Trade?
Swing trading is my top approach to trading so I am a little biased but this is what I have found to be true, for me:
The pros of swing trading include:
1. Bigger profit potential. Since you are looking for larger runs in price, you have the ability to enjoy much greater profits than you would if you day traded the same market
2. Less time trading. The best swing trade techniques I have ever seen only required a minimal amount of time at the computer screen. The scan for potential trading opportunities can be fast and you can do it during the slower times of the markets. This allows those that are employed full time a chance to view the charts and find trading opportunities.
3. Greater risk to reward opportunities. The swings you are trading have the potential to travel further to your profit targets than they do to where you would place your stop loss when the trade setup is violated. Risk to reward ratios of 1:3, 1:5 and even 1:10 are not unheard of.
4. Having less stress. Unlike day trading where you are reacting to minor price blips, you expect larger price moves in swing trades that, most times, won’t challenge your protective stop price.
While the advantages to swing trading are compelling, there are disadvantages as well.
1. Getting caught in a congested market with violent swings in each direction can stop you out repeatedly causing you many losses. This is where proper risk measures come into play.
2. Your protective stop orders are generally bigger in distance which, if you do not adhere to proper risk profiles, can have you lose a great portion of your trading account when the losses come.
3. The ease of swing trading can have traders involved in too many markets at the same time. This can be a disadvantage and put too much capital at risk in the markets if/when your swing trading strategy delivers a losing streak.
I will tell you that my favorite market to swing trade is Forex. Due to my broker, I can dial in risk to the pip, I have plenty of trading options with all the currency pairs, and when price starts to move, it can move fast and far.
If you have decided that swing trading is something for you, let’s get to some of the best swing trading methods that I have used over the years.
Swing Trading Strategy 1 – Play The Price Range
Markets range and expand every single day in any market. For this strategy, we are looking to define a price range and look for a certain price pattern that we can trade.
- The key is to find clear support levels that we can use to buy
- We also need resistance levels we can short.
This is a daily chart of a Forex pair. Remember, it doesn’t matter what time frame you use as we are looking to trade one clean swing.
What should be clear is that lower time frames are going to have smaller swings before a reversal occurs. Just be aware of that.
- Define support and resistance zones
- While price did come to resistance and drop, you would not have taken this trade. Why? No setup occurred.
- Here is the setup and is known as a failure test. We look for price to test below support (for a long trade) and we buy the break of the reversal candlestick as our entry point.
- This swing begins to terminate at a previous congestion zone. The swing is over and you take profits.
Stops are needed and can go under the setup candlestick. One note on this setup is you may get stopped out only to see price regain support. This is simply a higher time frame making the same price move. Be prepared to take another entry.
You can learn more about trading ranges at this post.
Swing Trading Strategy 2 – Join The Trend
Trends ebb and flow with corrective and impulse price moves. By looking for a strong trending market, we look to rejoin the main price direction after a brief pause in the action.
It’s easy to find perfect conditions so I wanted to use one that had other factors to consider.
The bottom line is we are looking to join in to what could be a continuation of price. To do so, we need to add a few conditions.
- Price was trading in a range and broke out. In the bottom pane is the 3 10 oscillator we will use for momentum. Notice the line showing a higher high was made when price made a higher high on the breakout. This helps confirm the breakout and we are now looking to trade a trend move.
- Price pulls back, a corrective decline. We use a standard trend line and enter when price breaks the trend line and closes.
- Price made pauses along the way which gave a great location to put in a trailing stop. Price would have taken you out in this location as we are had slightly stronger adverse price moves.
Stops and targets are personal preference. Using the ATR for stops is my preferred placement and scaling out at 1 times my risk.
Swing Trading Strategy 3 – Ride The Correction
This swing trading strategy will require a little more attention than the others. We will be looking to play a price correction against the overall price move.
There are several ways we can do this and it is not just in a range environment like in strategy number one.
To aid in the decision making, we are going to use the momentum indicator set to 10 periods.
- The momentum indicator is putting in a higher low which shows momentum increasing
- Price puts in a marginal new low which is opposite to the momentum indicator – bullish divergence
- You can enter at the market or a break of the candlestick using resistance as a trade management or exit the trade at this zone.
The long appears very similar to strategy number one however we are not looking for a range as the basis for the setup.
How To Manage Your Swing Trades
Trade management is vital to the success of your trading strategy. With swing trading, we do have several ways we can deal with the trade once you’ve entered.
As mentioned earlier, I use the average true range to set my stop loss. Knowing my stop level, I can set targets to capture gains of a multiple of my risk.
- 1 X risk = scale out and stop to break even. Trades should get to at least 1R.
- 2 X risk = further scale or close the trade
This is a hands off approach where I can set the orders once the trade is entered. It takes the emotions of trading and allows the trade to evolve.
You can also trail your stop loss which is more of an active management approach.
The trick is to make sure your stop is tight enough to get you out of true adverse moves.
On the flip side, the stop should be far enough to avoid bull or bear traps.
This chart shows a buy using swing trading strategy number 3.
The blue line is the 5 period Donchian channel lower line only. For a trailing stop, you can adjust the stop loss on the close of each candlestick. The red line is where this long trade would have been stopped out. You can adjust the channel settings depending on how tight you want the stop to be.
Why the “5” period setting? Considering this trade is against the trend direction, I am considering a short term trade.
You can even use a simple moving average to trail your stop however I prefer a volatility measure or actual price levels as with the channel above.
You may consider using support and resistance levels for your stops. However, you may want to ensure the levels you are using actually have meaning. You can learn more about support and resistance here.
What Did We Cover?
There is enough information here to get you started in designing a complete swing trading system of your own:
- Swing trading is about trading one clean swing in the market and not sitting through a strong price retracement
- You learned you can trade a price range that has defined support and resistance levels. We use a price action entry, a failure test, to tip the odds in our favor
- Joining the trend is looking at a momentum reading and trading a corrective move in the direction of the impulse move
- Riding the correction is using a divergence method plus price action to entry a counter trend short term trade
- We looked at several ways to profit from the move and how to protect the downside risk in a trade
Most of all, I hope you realize that simple works in swing trading.
Trading strategies do not have to be complicated.
Other Swing Trading Strategies To Consider
I gave you 3 great trading strategies you can use but there are more options than that!
Here are several trading strategies that can be used for a swing trading style approach to the markets:
- 3 EMA Trading Strategy – Using moving averages to form the basis of your approach
- RSI 2 Strategy – Taking advantage of oversold and overbought market conditions for short term trading
- The 50 day moving average strategy – Using a longer term average to gauge market direction and pullback zones
Just ensure you make up a full trading plan when you consider any trading approach.