Best Swing Trading Strategies That Work
Swing trading is a great compromise between the constant attention that day traders must give to the market and the margin requirements and massive amount of patience required of a long-term trader.
What is Swing Trading?
Swing trading is the practice of attempting to profit by trading on market moves that occur over the course of a timeframe between a few days to a few weeks. This timeframe is good for most people as it does not require a swing trader to quit his or her full-time job.
What is a Swing Trade?
Since swing trading attempts to capture moves in duration of a few days to a few weeks, swing trades typically must stay open overnight and through weekends. This makes swing trading more margin intensive than day trading due to swaps, which are the interest that is charged at the end of the closing day for keeping a trade open. Since day traders typically close their trades before the end of the day and don’t keep them open overnight, they do not face this additional cost.
Swing Trading Strategies
Here are the top 3 swing trading strategies that work. This section will cover the basics of each strategy and give you some details about the setups for each.
Trading the Trend
An uptrend is defined by higher highs and higher lows while a downtrend is identified by lower lows and lower highs. Find an uptrend that is holding to a support level or a downtrend that is holding to a resistance level. This support or resistance level can be anything, but it should be something you are familiar with. It could be simply a trendline or it could be a moving average. The 50-period simple moving average is a popular choice for this. Wait for a countertrend to develop. When it tests the support or resistance that you have identified,
- Set a limit entry order to enter the position when price crosses back across the level;
- Set your stop loss beyond the extreme of the countertrend movement;
- Generally, you should set the take-profit level at a 2:1 ratio to the potential loss you have calculated for the stop loss. Verify that this makes sense from the past price action of the market. If a 2:1 risk-reward ratio is not realistic, then the trade should not be entered.
Pin Bar Strategy
This is similar to the trading the trend above but relies on a very particular type of candle to appear. A pin bar is a candle with a long tail on one end. This candle is often a signal that a reversal is about to take place. A bullish pin bar has a long tail on the bottom of the candle, suggesting that the lower price was powerfully rejected. A bearish pin bar has a long tail at the top of the candle, indicative that a higher price level was rejected.
- The entry point should be when the first candle closes above the short tail on a bullish pin bar or below the short tail on a bearish pin bar;
- Set the stop loss beyond the short tail of the pin bar;
- Calculate the length of the pin bar from tail to tail. Double this figure and use it to place your take-profit point away from the entry point.
Another strategy that swing traders use is to find a channel that defines an upper and lower bound that price is ranging between. Such a channel can be horizontal or it can be diagonal. Some conservative traders insist only on trading with the larger trend, while other traders will ride the price up or down regardless of the bigger picture. Either way, this strategy gets triggered when price crosses one of the trendlines.
- Set a limit entry order to enter the trade when it crosses back between the two trendlines;
- Your take-profit should be set at the other trendline and your stop loss should be set 10 pips beyond the trendline just crossed.
Swing trading is a flexible style of trading that suits a large number of Forex traders. Swing trading methods are also used by traders in stocks. Since you are not limited to making all your profit in one day, you can make money with smaller positions and therefore manage your risk more effectively. The swing trading techniques listed above are both effective and practical. They make a fine foundation upon which to build a solid Forex swing trading system.