What Is It, How Swing Trading Works And What Are The Advantages
The definition of trading itself has already implied an important time component. There is a need for dynamism in price fluctuations. In other words, trading is possible if the prices of financial assets (e.g. the price of currency pairs) move within a short-term time horizon. This is the concept of business. The concept of Swing Trading defines an entire investment philosophy, both in Forex and other markets. We will try to explain it in depth in this article, so if you wonder what Swing Trading is and what are the keys to mastering this style, you can read on.
What distinguishes one style from another is precisely the time horizon of the trade, which determines the entire strategy to follow. The time factor is of paramount importance in trading.
What is known as “swing trading” is nothing more than the application of trading techniques or methods to a time horizon that is usually not limited to a single day, which on the other hand encompasses the method of execution of operations known as “daytrading”. The main advantage of the Swing Trading is that the techniques of analysis and execution of the operations eliminate or reduce sensitively the “noise of bottom of the markets” that increases in the shorter temporalities, being the price more subject to manipulation.
The main advantages of Swing Trading, all deriving from the exploitation of greater impulses and having more time available to carry out analysis, are:
- Operate with less pressure
- Operate in several markets at the same time
- Higher earnings targets
- No need to use a lever too high
Swing Trading And Technical Analysis Principles
In Swing Trading, the main objective is to exploit a market impulse (both bullish and bearish).
According to Dow’s theory (the father of technical analysis of the stock market), the market moves forming three types of trend, one within the other:
- the primary or structural trend that is usually more than a year old;
- the secondary trend ranging from about three weeks to about three months;
- the minor trend, which is all the oscillation within the secondary trend.
Normally these minor fluctuations range from about 2 to 10 days and Swing Trading takes advantage of these fluctuations.
Swing Trading Strategies
When we talk about swing trading strategy it means that we take a specific risk that is known as “overnight” risk. This risk is due to the fact that we leave a trade open in a closed market and it can happen that a news that occurs during the closing, with the consequent inability to trade in this market, causes gains or losses in the open position suddenly and uncontrolled. Think for example when you leave positions open at the weekend when the forex market is also closed.
The techniques or strategies that can be used are very different and varied and also affect the emotional aspect and leverage management.
In terms of graphical platform and market analysis, a swing trader first tries to define the general trend of the financial instrument. This is why he uses daily, even weekly and monthly time charts.
Once the general market trend is determined, operational decisions (when entering the market and in which direction) are made on charts with a lower time frame, for example 1 hour or 4 hours.
Swing Trading Points
Once we have identified the general trend of the market we are analyzing, we will have to try to privilege operations in favour of the main trend, which are much more likely to generate pulses of longer duration and amplitude, compared to operating in countertrend. In this sense, we must remember that not all markets adapt well to this type of strategy.
Identification of swing trading points. These are the maximum and minimum points where the swing points will be produced. In order to identify them we can get help from specific indicators or other tools such as long-term average trendlines, Fibonacci levels, relative highs and lows, etc.
Before entering the market we should wait for a confirmation of the swing points and not try to guess a future movement. Clearly doing this will always result in a certain delay in entry and the more we are strict in validating the confirmation of our swing point (input filter), the more we will be able to obtain effective results but at the cost of benefiting from lower traits of our swing impulse.
Swing Trading Techniques
What is of fundamental importance in defining a technique are three important aspects:
- Where to place the stop loss
If the price breaks a downward trend, we will open a short position and the Stop Loss should be a few pips above the trend line.
If the price breaks an upward trend, we will open a long position and the Stop Loss should be a few pips below the trend line.
In both cases we must leave sufficient margin depending on the intrinsic volatility of the market so that the trade does not close.
- Where to place the take profit
In case the market is bullish, the Take Profit could be placed for example in the last maximum of the market (according to the daily chart).
In case the market is bearish and breaks the support, the Take Profit could be placed for example in the last minimum of the market (according to the daily chart).
- Size of Open positions
The size of the position could be that corresponding to a maximum loss of 1% or 2% of the capital of your account, although it is always better to establish the losses not only for a fixed percentage but in association with a careful technical analysis.