Swing trading is one of the few trading approaches that’s suitable for the retail trader — even if you have a full-time job.
Because it doesn’t require you to spend all day in front of your screen, and it still offers enough trading opportunities so you can generate a consistent return from the markets.
Do you want to learn more?
Then today’s swing trading guide is for you because you’ll learn:
- What is swing trading and how does it work
- Where to find the best swing trading opportunities
- How do you time your entries for swing trading
- Where to set your stop loss so you don’t get stopped out prematurely
- Where to take profits before the market does a 180-degree reversal against you
- A swing trading strategy that works
Are you PUMPED?
Then let’s begin!
Swing trading basics: What is swing trading and how does it work
Swing trading is a trading methodology that seeks to capture a swing (or “one move”) in the markets.
The idea is to endure as “little pain” as possible by exiting your trades before the opposing pressure comes in.
This means you’ll book your profits before the market reverse and wipe out your gains.
Here’s an example:
Here’s an example of swing trading on USD/JPY:
And here are the pros & cons of swing trading…
- You don’t need to spend hours in front of your monitor because your trades last for days or even weeks
- It’s suitable for those with a full-time job
- Less stress compared to day trading
- You won’t be able to ride trends
- You have overnight risk
So far so good?
Then let’s move on to cover swing trading entry exit strategies…
Swing trading methods: Where to find the best trading opportunities
Let me ask you:
When you go down to a supermarket and you’re looking to buy apples, would you buy it when it’s for $10?
You’d rather wait a few days to see if the price drops so you can buy it for $2 or less.
And it’s the same for swing trading!
You don’t want to go long when the price is sky-high.
Instead, you want to enter from an area of value where the price is “cheap”.
You’re probably wondering:
“How do you define an area of value?”
Well, you can use…
Support and Resistance
Support – an area on your chart with potential buying pressure
Resistance – an area on the chart with potential selling pressure
So if you want to “buy low sell high”… then long Support and short Resistance.
But that’s not all because you can also use…
Moving Average (MA)
Here’s how it works:
When the market is trending, it doesn’t go up in one straight line.
It moves higher, pullback towards an area of value, and then continue trading higher.
And where does the market retrace to?
Possibly towards the Moving Average.
In a strong trending market, the price tends to pullback towards the 20MA.
In a healthy trending, the price tends to pullback towards the 50MA.
In a weak trend, the price tends to pullback towards the 100MA and beyond.
Upward Trend Line — “Sloping” area on the chart that shows upward buying pressure.
Downward Trend Line — “Sloping” area on the chart that shows downward selling pressure.
Here’s an Upward Trend Line example:
You’ll discover more on swing trading entry strategy and how to better time your entries when swing trading.
Swing trading: When do you enter a trade?
There are generally 2 ways you can go about it.
You can enter a trade the moment the price reaches an area of value or, let it show signs of reversal before putting on a trade.
Now there’s no right or wrong, both approaches can work.
But personally, I’d prefer to let the market show signs of reversal first.
- The False Break
- Bullish reversal candlestick patterns — Hammer
- Bearish reversal candlestick patterns — Shooting Star
Let me explain…
The False Break
This swing trading entry strategy takes advantage of breakout traders who are “trapped”.
Here’s how it works…
Breakout traders tend to go long on the break of the highs.
But what happens when the market breaks out higher, only to reverse towards the downside?
Well, now the breakout traders are “trapped” as their long positions are in the red.
And if the market continues to lower, it will trigger their stop loss which fuels further price decline.
And this is how The False Break can serve as an entry trigger into a trade.
Here’s an example: A False Break at the highs
Bullish reversal candlestick patterns — Hammer
Bullish reversal candlestick patterns signify that buyers are momentarily in control.
Now, there are different bullish reversals candlestick patterns like Hammer, Bullish Engulfing, Morning Star, and etc.
But for this article, I’ll cover the Hammer:
A Hammer is a (1- candle) bullish reversal pattern that forms after a decline in price.
Here’s how to recognize it:
- Little to no upper shadow
- The price closes at the top ¼ of the range
- The lower shadow is about 2 or 3 times the length of the body
And this is what a Hammer means…
- When the market opens, the sellers took control and pushed price lower
- At the selling climax, huge buying pressure stepped in and pushed price higher
- The buying pressure is so strong that it closed above the opening price
In short, a hammer is a bullish reversal candlestick pattern that shows rejection of lower prices.
Bearish reversal candlestick patterns — Shooting Star
Bearish reversal candlestick patterns signify that sellers are momentarily in control.
Now, there are different bearish reversals candlestick patterns like Shooting Star, Bearish Engulfing, Evening Star, and etc.
But for this article, I’ll cover the Shooting Star:
A Shooting Star is a (1- candle) bearish reversal pattern that forms after an advanced in price.
Here’s how to recognize it:
- Little to no lower shadow
- The price closes at the bottom ¼ of the range
- The upper shadow is about 2 or 3 times the length of the body
And this is what a Shooting Star means…
- When the market opens, the buyers took control and pushed price higher
- At the buying climax, huge selling pressure stepped in and pushed price lower
- The selling pressure is so strong that it closed below the opening price
In short, a Shooting Star is a bearish reversal candlestick pattern that shows rejection of higher prices.
Now, if you want to learn more about the different candlestick patterns, then go check out The Monster Guide to Candlestick Patterns.
Let’s move on…
Swing trading: Where to set your stop loss so you don’t get stopped out prematurely
One of the biggest mistakes you can make is to have a TIGHT stop loss.
You’re probably thinking…
“But a tight stop loss reduces my risk and improves my risk to reward.”
Because more often than not, you’ll get stopped first before the market can move in your favour.
This means your analysis might be correct but you still end up losing money because your stop loss is too TIGHT.
So, what’s the solution?
Increase the size of your stop loss so you can withstand the “noise” of the markets and watch the market move in your favour.
Your stop loss must be at a location where if reached, will invalidate your trading setup.
This means if you short a head & shoulders pattern, then your stop loss should be at a level where if the market hits it, the entire pattern is “destroyed”.
Or if you’re long Support, then your stop loss should be below Support such that if the market hits it, chances are, Support is broken.
Now, I don’t suggest placing your stops just below Support or Resistance because you’ll get stop hunted easily.
Instead, give it some “buffer” so your trade has more room to breathe.
If you want to decide how much “buffer” to give, you can use the Average True Range (ATR) indicator and set your stop loss 1ATR below Support.
Here’s what I mean:
Now if you want a more detailed explanation of this concept, then go watch this training video below…
Swing trading: Where to take profits before the market does a 180-degree reversal against you
The idea of swing trading is to endure as “little pain” as possible by exiting your trades before the opposing pressure comes in.
So what exactly does it mean?
If you’re long, you’ll want to take profit at areas where selling pressure could come in (like swing high, Resistance, and etc.).
Or, if you’re short, you’ll want to take profit at areas where buying pressure could come in (like swing low, Support, and etc.).
Pro tip: Don’t set your target profit at the absolute high/low because the market may do a 180-degree reversal before it reaches your target.
Instead, look to exit your trades a few pips earlier before your target profit.
A simple swing trading strategy that works
Now, let’s piece the puzzles together and so you can develop a swing trading strategy that works.
Here’s how to do it:
- Identify a range market (market condition)
- Wait for the price to reach Support (area of value)
- If the price reaches Support, then wait for a False Break (entry trigger)
- Set your stop loss 1 ATR below the candle low and take profits before Resistance (stop loss and target profit)
And here’s another (but in a downtrend):
This isn’t the only way to swing trade the markets.
Because by using the principles I’ve shared, you can also use different areas of value like (trend line, trend channel, moving average, and etc.).
If you want to learn more, check out Swing Trading Strategies That Work.
Frequently asked questions
#1: Which moving average do you apply to the charts?
On my TradingView, I have the 20, 50 and 200 MAs on standby. But I’ll only turn them on if they make sense. For example:
- If the price is in a strong trend, then I’ll display the 20 MA
- If the price is in a healthy trend, then I’ll display the 50 MA
- If the price doesn’t respect any MA, then I won’t have any MAs on my chart
#2: Which is the best timeframe to use for swing trading?
There is no best timeframe. The best timeframe is probably the one which you can commit to and trade consistently with. For me, I like to take swing trades anywhere between the 4-hour and daily timeframe.
#3: Which of these is the best to use in swing trading entry exit strategies – support resistance, moving average or trendline?
There’s no best one over here. It depends on the market condition:
- If the market is in a weak trend or in a range, then support resistance will be useful
- If the market is in a strong trend, then you might want to use the 20 MA
- If the market is in a healthy trend, then you could use the 50 MA
- If the market is respecting a trendline, then you could use that trendline
So it all depends on the market condition at the moment.
You’ve learned in today’s swing trading guide—swing trading is about capturing “one move” in the market by exiting your trades before opposing pressure comes in.
In essence, here’s what you’re doing:
- Identify an area of value to trade from
- Wait for an entry trigger
- Set your stop loss away from the “noise” of the markets
- Look to capture one swing by taking profits before the market structure
Now here’s what I’d like to know…
How do you swing trade the markets?
Once again, this article is a guest post and was originally posted on Rayner‘s profile on InvestingNote.
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