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Swing Trading Strategies That Work

Sebencapital

Published
06/10/23
Swing Trading Strategies That Work

Are you tired of watching the market take a nosedive when you hit that buy button?

Do you find it excruciating to witness your profit and loss swinging back and forth like a pendulum?

It can be frustrating when the market teases you by getting close to your target profit, only to reverse course and hit your stop loss suddenly.

If you're nodding in agreement to any of these experiences, the solution might be simpler than you think – swing trading.

Now, you might be curious:

"What exactly is swing trading, and how can it help me?"

Fret not, as in this article, we'll delve into the world of swing trading, giving you the lowdown on what it is and how it operates. Moreover, we'll explore three reliable swing trading strategies to help you navigate the markets effectively.

Sounds intriguing? Let's dive in and explore the world of swing trading.

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").

The idea is to endure as "little pain" as possible by exiting your trades before the opposing pressure comes in.

You'll book your profits before the market reverses and wipe out your gains.

Here's an example of a swing trade:

What is swing trading, and how does it work

Next, here are the pros & cons of swing trading…

Pros:

  • Swing trading allows you to escape the need for constant monitoring since your trades span days or weeks.
  • Ideal for individuals with full-time jobs who can't be glued to the screen all day.
  • Offers a less stressful trading experience compared to the fast-paced world of day trading.

Cons:

  • You may miss out on riding prolonged trends due to the shorter trade durations.
  • There's overnight risk involved in swing trading, which means market developments can affect your positions while you're not actively trading.

So, with these advantages and drawbacks in mind, let's delve deeper into swing trading.

Swing trading strategies 1: Stuck in a box

And one thing…

The swing trading strategies I will share with you have "interesting" names attached to them.

This helps you understand the trading setup better to know how to apply it.

Now, let me introduce the first swing trading strategy for today…

Stuck in a box.

It's swing trading in a range market because the market is "stuck" between Support and Resistance (somewhat like a box).

Here's how it works:

  • Identify a range of market
  • Wait for the price to break below the Support
  • If the price breaks below Support, then wait for a strong price rejection (a close above Support)
  • If there's a strong price rejection, then go long on the next candle open
  • Set your stop loss 1 ATR below the candle low and take profits before the Resistance

Here's an example of swing trading in forex:

Swing trading strategies #1: Stuck in a box

You might be pondering:

"Why is it necessary to take profits before hitting Resistance?"

Here's the key to understanding this:

As a swing trader, your objective is to capture a singular substantial move in the market. To enhance the likelihood of a successful trade, it's prudent to exit your positions before encountering selling pressure, which typically materializes at Resistance levels.

Does this make sense?

Great, because this concept will serve as the foundation for the remaining swing trading strategies we're about to explore.

Next…

Swing trading strategies 2: Catch the Wave

This swing trading strategy operates on the premise of capturing a single potent move within a trending market – much like a surfer aiming to catch the perfect Wave.

The key here is to enter after the pullback has concluded, indicating a higher probability of the trend resuming.

However, it's important to note that this strategy isn't suited for all trends. It's most effective when the trend experiences a more substantial pullback, offering greater profit potential.

As a general guideline, you should look for trends with pullbacks that extend at least to the 50-period moving average (MA) or go even deeper.

Here's how to ride the Wave with this swing trading strategy:

  • Identify a trend that respects the 50MA.
  • Wait for a bullish price rejection when the market approaches the moving average.
  • Consider going long on the next candle if a bullish price rejection occurs.
  • To manage risk, set your stop loss at 1 Average True Range (ATR) below the low of your entry candle.
  • For taking profits, aim to exit just before reaching the swing high.

This strategy aligns to capture substantial trend movements and offers a clear framework for trade entry and exit.

Here's an example:

Swing trading strategies #2: Catch the Wave

You might be curious about the rationale behind using the 50-period moving average:

The 50MA is favored because it's closely monitored by traders worldwide, which can result in a self-fulfilling prophecy. Its widespread recognition can lead to many traders making decisions based on this moving average, potentially reinforcing its impact on price movements.

Furthermore, the 50MA often aligns with previous Resistance levels that have become Support. This confluence makes it an even more potent level in terms of providing support to the market.

However, it's essential to emphasize that the concept is more critical than the specific moving average period. While the 50MA is commonly used, you can experiment with different periods, such as 55, 67, 89, or any other you prefer. The key lies in understanding and adapting the concept to your trading style and preferences.

Swing trading strategies 3: Fade the move

You might be pondering the meaning of "fade." In trading, "fade" means going against, particularly the prevailing momentum, often called counter-trend trading.

This strategy suits you if you're a trader who enjoys taking the contrarian approach and going against the crowd.

Here's how this strategy operates:

  • Start by identifying a robust momentum move that surges into Resistance, surpassing the previous high.
  • Watch for a pronounced price rejection as the candle forms a substantial bearish close, indicating a potential reversal.
  • If these conditions align, consider going short on the next candle.
  • To manage risk, set your stop loss at 1 Average True Range (ATR) above the highs of your entry candle.
  • For profit-taking, aim to exit your position just before reaching the nearest swing low.

This strategy embraces the contrarian approach of trading against the prevailing momentum, catering to those traders who succeed in "fading" market moves.

Here's an example:

Swing trading strategies #3: Fade the move

You've gained insight into three effective swing trading strategies, but an equally important aspect that's yet to be addressed is trade management.

For instance:

What should you do if you're in a trade, and the market hasn't triggered your stop loss but hasn't reached your target profit either?

Should you hold the trade, exit it, or rely on luck?

Rest assured, these critical aspects of trade management will be explored in the upcoming section, providing you with a comprehensive understanding of navigating such scenarios and more.

How to manage your trades so you can trade with confidence and conviction

Now, with trade management, there are two ways you can go about it…

  • Passive trade management
  • Active management

I'll explain…

1. Passive trade management

In this approach, you employ a hands-off method. You allow the market to reach your predetermined stop loss or target profit. Any price action that unfolds in between is observed without intervention.

The key to this method lies in setting your stop loss far enough from the market "noise" and positioning your target profit within reasonable reach, ideally before encountering significant market structure.

Here are the advantages and drawbacks of this approach:

Pros:

  • Trading becomes more relaxed as your decisions become more "automated." You don't need to monitor the market or make real-time adjustments continuously.

Cons:

  • You cannot exit your trade beforehand, even if the market shows signs of a reversal. This lack of flexibility can be a drawback in certain situations.
  • It's possible to witness a winning trade transform into a full 1R (one times the risk) loss. This happens because you're not intervening to secure profits when the trade is in your favor, leaving room for potential reversals.

This method offers a more hands-off approach to trade management, allowing you to rely on predefined stop loss and target profit levels. While it can offer a sense of relaxation in your trading, it also comes with the risk of losing potential profits in favorable market conditions.

2.  Active management

In an active trade management approach, you closely monitor the market's behavior and decide whether to hold or exit the trade based on the observed price action.

Here's a critical point to keep in mind:

Managing your trades on your entry timeframe or even a higher one is essential to make an active approach work effectively. Avoid managing them on a lower timeframe, as this can lead to premature exiting trades due to smaller, routine pullbacks that occur on shorter timeframes.

Here are the advantages and disadvantages of an active trade management approach:

Pros:

  • You can minimize your losses by not allowing trades to turn into full 1R losses. This flexibility can help protect your capital more effectively.

Cons:

  • It can be more stressful compared to a hands-off approach. You need to stay vigilant and make decisions based on ongoing market conditions.
  • Exiting your trade too soon is risky, depriving it of sufficient room to fully develop and reach its profit potential.

If an active trade management approach aligns with your trading style, consider using techniques such as moving averages or observing the previous bar's high and low to guide your decisions effectively. These methods help you maintain a vigilant and active stance while managing your trades.

Let me explain…

  • Moving Average

This technique involves using a moving average indicator to trail your stops.

You'll hold on to the trade if the price doesn't break beyond the moving average.

If it does, then you'll exit the trade.

An example:

Moving Average

This technique is useful for swing trading strategies like Catch the Wave because the moving average acts as a dynamic Support and Resistance in trending markets.

Next…

  • Previous bar high/low

This technique relies on the previous bar high/low to trail your stop loss.

If you're short, you'll trail your stop loss using the previous bar high.

If the market breaks and closes above it, you'll exit the trade (and vice versa).

Here's what I mean:

Previous bar high/low

This technique is particularly valuable for swing trading strategies, especially those like "Fade the Move," where the market can swiftly reverse against your position.

You must be cautious about providing your trades with excessive leeway in such strategies. The goal is to act promptly and cut your losses when you spot signs of a potential reversal in the market. Being proactive and vigilant is vital in protecting your capital and ensuring that losing trades are managed effectively.

Conclusion

So here's what you've learned:

  • Swing trading is about capturing "one move" in the market by exiting your trades before the opposing pressure comes in.
  • Stuck in a Box is a swing trading strategy suited for range markets
  • Catch the Wave is a swing trading strategy suited for trending markets.
  • Fade the Move is a counter-trend swing trading strategy.
  • Active trade management is more stressful, but you get to minimize your losses.

Now, here's my question for you…

FAQ

1. Which of the three trading strategies above is the best?

There's no best swing trading strategy out there; it depends on your trading style to see which approach resonates with you.
For example, if you're a trend trader, you'll probably look for trend continuation setups using Strategy #2. If you're more of a contrarian trader, then Strategy #3 might be more suitable to fade the move.

2. How will I know if there's a bullish or price rejection on the next candle?

Before placing a trade, you'll have to wait for the candle to close. If the candle closes strongly near the high of the range, then it's a bullish price rejection. If the candle closes strongly near the low range, it's a bearish price rejection.

Written by Sauravsingh

Techpreneur and adept trader, Sauravsingh Tomar seamlessly blends the worlds of technology and finance. With rich experience in Forex and Stock markets, he's not only a trading maven but also a pioneer in innovative digital solutions. Beyond charts and code, Sauravsingh is a passionate mentor, guiding many towards financial and technological success. In his downtime, he's often found exploring new places or immersed in a compelling read.

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