Swing trading can be a profitable way to trade the markets on a shorter time frame, when compared to [my] normal style of trend trading that is longer term. Swing trading can keep you busier in the markets if that is your style. A swing trading strategy can last minutes a few days and occasionally weeks but not much more
What is a swing trading strategy?
Swing trading can be explained by when you are trading the price retracements of various levels of support and/or resistance. The support and resistance are commonly lines that you will draw or rebounds off of moving averages that you are using.
The swings can be happening over minutes hours and days. Swing traders rarely look further ahead than these periods.
If you look at this chart you can see that the German DAX has given us many opportunities to be in and out the market swing trading.
How do I Swing Trade
Swing trading is relatively easy to get started and can be made more profitable by have predefined entry and exit points that you adhere to religiously. In fact, it is these predefined points that swing trading relies on.
Swing trade example
In this simple swing trade example we can see that I have drawn support and resistance lines in blue.
I have drawn these lines at the lowest lows and highest highs on this 10 minute chart of the DAX
I am speculating that from these lines that the price will rebound and the price will revert. These lines are therefore called support lines. They are supporting the price from moving further down.
I am therefore speculating that the price is likely to retract from this line once reached.
If the price was to breakthrough either of these support or resistance lines this signifies a price breakout.
If we have a price breakout in either direction then what was the support line will become our new resistance line. So what was our resistance line will become our new support line.
When do I enter a Swing Trade
It’s hard with any trading system or strategy to enter the trade at the optimum moment so it is my advice to you that you shouldn’t sweat this too much.
Using our charts from above, a good entry point will be the second candle in the appropriate direction after the retracement from the support or resistance lines.
This second candle is a good sign that the price has indeed rebounded.
Also, using this approach of the second candle also gives you the exit point of your previous trade.
This analysis will never be 100% right but it will provide you with more winning than losing trades.
An interesting point to note is that on the above chart, many of the entry points come after a candle that looks like this. This is what is called a doji candle. It is used by many traders to signal a trend reversal.
Another Swing Trade Variation
Support and resistance line do not just have to be horizontal. Many support and resistance lines can be drawn diagonally when there is a smoother trend.
Swing trading is adapting to the current conditions of your chosen market.
Any market at any given time has the ability to change. As they are driven by human emotion this is understandable.
Drawing support and resistance lines
When you are going to try swing trading you can easily add support and resistance lines to charts using then draw line feature.
To draw support or resistance line you simply draw a straight line from the last high to the next highest high or from the last low to the next lowest low. I prefer to use at least 2 points [red lines] where the price has retracted to draw lines as this will signify stronger support or resistance.
You can’t really swing trade when the price is going sideways on a 1 minute chart, or 10, 15 minutes. The price range is often far to narrow. Therefore trying to cut a profit is far more difficult.
Although if you look at this 4 hour chart you can see that trading a sideways market can offer many a profitable opportunity over the course of a few days.
The next factor to making swing trading profitable is to manage risk. This is done by cutting your losses.
Cutting your losses
If you have been reading my blog for any time you’ll know that it is cutting your losses quick that contributes to winning more than you lose on any given trading time frame.
When cutting your losses day trading you need to be a lot quicker than when trading the longer term trend. Long term trend trading is far more forgiving to price fluctuations than day swing trading.
If you are trading the swing longer than a day then there is a little more give when cutting any losses.
Using our chart again, you might trade out and take a loss should the price go past and close beyond either the support or resistance lines after opening a trade on the second candle.
So if you opened a trade on the second candle after retracement but the price reversed and break out past your support or resistance line you close out for a small loss.
You can see from the above image that sometimes you’ll find you trade out only to see the price come back under/over your lines.
It’s annoying but that is just how it goes. It happens to everyone and does not mean the markets are out to get you personally, or that the strategy you are using for the first time is crap.
The point is that you do not want to be holding on to a trade should the price move to a full blown breakout… Ouch.
You can see from the chart beneath that the trend was up and reaches resistance. It then retracts slightly before breaking the resistance line only to retract again and start a swing reversal.
Other swing trading indicators
There are many other indicators that you can use to identify price movements. Some are very basic and easy to implement. Others can be ridiculously confusing and to me they seem unnecessarily so.
For me personally you can’t beat a good old Simple Moving Average or SMA. I’m probably leaning towards these as I have been using them since I started trading, but you cannot deny their accuracy.
Others that I have found that can lend some confirmation to entry points and/or trend direction are the Stochastic Oscillator and the MACD.
I find all these other indicators secondary to SMA’s but as said they can help a bit and have a place.
Chart styles to use
The best charts to use swing trading are candles. They can give you a clear view of the market in the blink of an eye. You can see that all the charts on this page use candles.
Using candles will help you understand how the market moves in a simple and accurate way.
You can take the candle chart one step further and use Heikin-Ashi bars instead of the standard candles. These candles are used to smooth out the trend and make trends more visible.
This is a 1 minute chart of the EURGBP using the Heikin-Ashi Candles.
You can see how the trends are more consistent and regular. These Heikin-Ashi charts are very useful for trading short time frames. You can read more about Heikin-Ashi charts here
This is the same chart using standard candles.
Maximising profits and Cutting your losses
Swing trading off of support and resistance lines or moving averages has the added benefit of giving clear entry and exit points. This process is often referred to as being mechanical.
Having mechanical entry and more importantly exit points can help with emotional trading.
In essence the emotion is taken out of having to exit a losing position as you simply do what the signals tell you to do.
This is easy to do on paper, but is one area new traders seem to suffer with the most. However if you start off with this disciplined approach and learn to trust the signals that you are given you will be far more likely to become a successful trader.
How much to trade and trading banks
If you are swing trading any of the forex markets, at many of the spread betting companies you can start trading from 0.10p. [even less at some] This is great for newbie traders.
So realistically you could open an account with £100 and be trading the foreign exchange within a few minutes.
As always, remember bank preservation is a key point in trading and you should not risk any more [margin] than 5% liability of your total bank size. Far better in fact to limit yourself to 2% or even 1% until familiar.
Remember it is compounding your profits over time that will make you money. It is not all about starting with the biggest bank that you can or can’t afford.
So to recap
- Swing trading is trading the short term price retracements
- You can swing trade by drawing support and resistance lines
- It’s easy to draw support and resistance lines
- You can use moving averages when swing trading
- Use Heikin-Ashi candle charts when swing trading
- Cut your losses quickly when swing trading