Swing trading is a method used in trading to find and capture a price swing or “one larger move.” It refers to exiting a trade before the opposing pressure comes in, going out with as “little pain” as possible, exiting the trade with profits before the market makes a reverse move and wipe out your gains.
While it can give you some overnight risks, you have less stress in comparison to day trading, and it suits well for people who have full-time jobs, mainly because it doesn't require you to spend hours in front of your monitor, trades often last for days, and in some occasions, even weeks.
But of course, if preferred - you can go on lower time-frames and still trade the swing trading strategy. By doing so, you would most often open and close trades within the same day.
Multiple strategies use price swings as a base to success, like the " Stuck in a box " or " Catch the wave " which are two of the most popular and effective swing trading strategies.
Stuck in a Box identifies a range market and waits for the price to break below support; if it does, it waits for a strong price rejection (a close rejection above support). Once there’s a strong price rejection, we should go long on the next candle open.
The trader can set the Stop-Loss below the latest rejection candle (or swing low) and place a Profit Target or a Take-Profit order at the resistance of the range.
That’s why it gets the name of “stuck in a box” - the market is basically “stuck” between support and resistance in a range and fails to break it.
In case of SHORT trades, the “stuck in a box” strategy is traded in the same way, only in the opposite direction of course.
And if the first strategy wasn’t exactly your cup of tea, you could give a try to this other strategy. The “Catch the Wave” swing strategy focuses on catching parts or “swings” in a trending market, like a surfer on a beach waiting to catch the wave.
This strategy aims to enter trades after the pullback has ended and when the predominant trend is likely to continue.
The problem with this approach is that it doesn't work for all types of trends; traders instead wait to trade on trends that have a deeper pullback, mostly because there's more reward towards the upside.
In this strategy, what you want to do is to identify a strong directional trend and as soon as the trend is in consolidation and/or correction, wait for strong Price Action reversal or chart pattern (preferably Price Action pattern located on important price level - round number or support/resistance).
For example, in a bullish trend wait for a bullish price rejection of lower levels (a bounce); Once that occurs a LONG trade can be initiated. The stop loss can be set below the low of the Price Action pattern and the first profit target at the most recent swing high.
Based on swing analysis you can also let the trade open and aim for more profits - as the trade is in the direction of the main trend, there will be usually much higher potential than the nearest swing high. Hence, additional targets can be placed above it to profit on a potential continuation of the trend and higher highs.
And of course, SELL trade opportunities look exactly the same only from the opposite direction.
Each price swing ends in a swing low or high, and there can be lower highs and lower lows, or higher highs and higher lows. The swing analysis is commonly used to identify trends and how they progress. It is also used to warn of a pending trend change.
To be more precise, every bullish trend consists of:
- higher highs
- higher lows
As soon as the market fails to make higher high or higher low, the current trend will most probably change.
And every bearish trend consists of:
- lower lows
- lower highs
And again, as soon as the market fails to make a new lower low or lower high, the current trend will most probably end.
This simple swing analysis can be used together with Price Action patterns and support and resistance zones for more comprehensive and profitable trading.
Many strategies are based on buying at strong levels of demands and using strong levels of supply to sell, these strong levels are often swinging lows and highs.
Traders make the use of substantial price movement from different basis to look and identify these zones. Nonetheless, no matter the trading style, swing analysis should definitely be a part of everyone's trading toolbox.