Swing trading is a trading technique which, as its name suggests, aims to take advantage of the market “Oscillations”.
Who Trade Swing Trading?
Swing trading is a simple method, to beginners scope, but it can be very effective for experienced traders who have mastered it and applied it with rigor. Its principles can be adopted for other more sophisticated techniques. It should be noted that the positions taken are generally not stored for more than few days, making this technique halfway between day trading and trades in the medium term.
How To Use This Technique?
To apply this technique, the first step is to identify the prices trend, whether an uptrend, downtrend, or trading-range, the trader must always be in the direction of the trend. To know the direction of the trend, the trader can use the moving averages or some indicators such as MACD or stochastic.
Once identified the trend, the trader will look for the optimal entry point (a high point in a downtrend for example). Those entry points can be defined by several ways. The first, and probably the easiest one, is to take advantage of the supports and resistances marked on the prices, the trader can benefit also of the return on resistance to sell and on a support to buy. Another strategy, the trader can expect a prices return to its moving averages. We can use the 20-day moving average, but again it is up to everyone to choose the horizon that suits to him the best, and should perform several tests on the basis of market in which he operates. Another possibility, the trader can draw a Fibonacci retracement of the last trend movement and monitor the correction on each level. There are of course many other ways to determine entry points but those are the most common.
Once the entry point is found, and before opening the position, the trader should define the level of his scenario invalidating in which he should put his stop-loss order to limit his losses. The level of take-profit must also be defined in advance and preferably even if the trader may choose to accompany the trend by following his stop to enjoy the movement. Again it is up to everyone to adapt his technique to his trading style !
Before opening the position, the trader should ensure that his gains / losses ratio is interesting in function of risk-taking. If the trader believes that the probability of success is 1 in 2, and 3 times more risk than what he can win, the trade is to avoid… The gains rate alone does not give ANY information about the quality of the technique. To be meaningful, this rate must be associated with a ratio of gains / losses. If a technique has 99% success but a failure can cause the failure of the trader, it means that it is not a good technique! The mathematic expectation of a technique is the real factor to take into account.
Swing technique is applicable in many markets (stocks, currencies, commodities …) and it is very popular because it is relatively simple in principle and does not require much time presence in the market just for day trading or scalping. It is not a miracle technique, but with simple indicators, good money management, and excellent management of emotions can lead to very good results.