Best Swing Trading Strategies
Financial trading is multifaceted due to the variety of markets and assets, trading systems (TS), strategies and styles. One of the latter is swing trading, which combines many strategies aimed at extracting maximum profit from price fluctuations (swings).
The concept of swing trading has been known for a long time – the basics of this style were described back in the middle of the 20th century by George Taylor. Considering the futures market, the author of the swing trading book “The Taylor Trading Technique” proposed the use of cycle theory and trading from technical levels, formulated the rules for holding and closing positions. The described swing tactics are applicable in other markets, in other trading conditions and allow you to create profitable trading strategies in intervals from several hours to several days (weeks).
In the 90s of the last century, the craze of intraday technicians for traders, thanks to the next global changes in the markets, began to bring more losses than profits. This has sparked an increased focus on high frequency trading (HFT) and position trading based long term investments. The number of market participants studying and applying swing-trading provisions has also significantly increased.
However, not everyone can master the swing trading style. Profitable trading requires the skills of analysis (fundamental and the use of technical tools), experience that allows, at least, to recognize the stages of the asset and swing movement, the level of psychological preparation. It is quite difficult to cope with the task, especially for beginners and traders who are used to making quick profits from intraday trading.
What it is?
Swing trading from – swing, reversal, swing) – a style of trading in financial markets that uses price fluctuations (swings) to maximize profit with a minimum number of transactions.
This definition includes several principles that combine techniques and strategies:
- The trader works with swings – components of the market movement cycle, price fluctuations, a wave (or several waves) of buying or selling.
- The trade does not use large leverage and short stops – this allows you to reduce risks and fully realize the potential of the selected movement.
- The task of opening is to accurately identify the swing, to determine the beginning of the next price wave in order to get the best entry point.
- The task for closing is to hold an open position for the time interval required to maximize profit (from several hours to several days), exit the market when signs of swing completion appear.
- Work using swings can be carried out both in a directional movement and in a price range – a trader must own several trading tactics and apply them depending on the current state of the market.
It is obvious that the application of these principles is within the reach of only a market player with a high level of theoretical knowledge, practical trading experience, and psychological stability. He is required to have a competent fundamental analysis of the market (s), the choice and use of technical analysis tools, the ability to calculate the degree of risk, movement targets and levels of fixing losses.
Swing-trading does not imply opening deals in flat (in narrow price ranges) or during strong speculative movements. The main income for traders of this style comes from powerful protracted trend movements. But this approach limits trading opportunities – most of the time (about 70%) the price is in the consolidation zones. At the same time, for example, the FOREX market is characterized by a high correlation coefficient of currency pairs, due to which the trader will have to wait for the appearance of the next swing and the optimal moment to conclude a transaction over a long-time interval.
Therefore, this trading style requires the selection of markets with a high level of diversification. These include, for example, the derivatives markets (futures and options, it was for the first that swing trading techniques were first described) or the US stock market with more than 6,000 available assets.
The definition allows to unambiguously formulate the goals of swing trading:
- ensure accurate market entry, minimizing the risk of a loss immediately after the conclusion of the transaction;
- maximize market movement by turning swing into income (ideally up to 100%);
- get the maximum profit from the minimum number of transactions, spending a minimum of time at the terminal (monitoring the state of the market and the current nature of the price chart).
In fact, the goals of this trading style overlap with the goals of positional trading and long-term investing, which are aimed at making money in the financial markets, even for those who do not have the ability or desire to devote a significant portion of their time to market analysis and maintenance of open positions.
The growing number of swing-trading adherents is explained by the advantages that are characteristic of this trading style:
- the possibility of making a profit regardless of the state of the market. Techniques involve identifying a swing and finding the optimal entry point, calculating the profit potential from price fluctuations both with pronounced trends and the movement of the asset price in a range;
- minimization of risks – the transaction is concluded only with full confidence in the achievement of a positive result, and the profit / risk ratio is chosen not worse than 2: 1;
- the correct choice of strategy, the accuracy of fundamental and technical analysis provide coverage of most of the market movement, which brings a solid profit in each transaction (in day trading and scalping);
- time consumption, psychological pressure when trading swing is less than when using intraday strategies or other techniques with short stops or mandatory closing of positions on the market.