Swing trading sounds sexy, but how does this trading strategy actually work and how can you profit from swing trading? In this blogpost I’ll try to share everything and provide you with some nice examples.
What is swing trading?
Swing trading is a way of playing the markets for the short to medium term and can be used as a trading strategy in any market. So not only for stocks or Forex, but also for commodities such as gold or even in crypto such as Bitcoin.
With intraday trading, you keep positions open for no longer than a day, but with swing trading your trades usually run for several days and sometimes even a few weeks.
The purpose of swing trading is to recognize and identify the overall trend. As a swing trader you then try to make a profit by taking advantage of swings within that trend. Technical analysis is used to find these swings.
Most swing traders first look at the overall trend of for example a stock. If the stock is in an uptrend, you look for buying opportunities (go long). In a down trend you look for good places to sell (go short).
Swing trading when the market moves sideways
Often there is no clear bullish (up) or bearish (down) trend on a chart. The market is ranging and moving sideways. This usually happens between two support and resistance zones.
You can find the resistance on your chart by looking at where price reaches its peak, stalls and drops back down. Support can be found by looking where price is moving down, reaching its low point and bounces back up.
You can also swing trade in a sideways market by buying near support and selling near resistance.
Example of swing trading in an up trend
The trend of a stock never moves in a straight line, but usually in steps. For example; a share can rise a couple of days, then take a step back for a few days and then continue to rise again.
If you stick all these zigzags together, the chart moves up in a general uptrend, but dips are also visible within that uptrend.
As a swing trader you look for a first move up as part of the general trend, followed by a reversal or pullback. You then want to buy on that pullback (go long) and hope that the trend continues upwards.
How to determine an entry for swing trading in an up trend
Because it is unknown how many days or weeks a reversal or pullback lasts, you only want to enter a trade if price shows you that it will continue the upward trend.
So you want some kind of confirmation.
One way to do that is by looking at the price action. A confirmation could be for example when the high of the previous day is broken at the top. This then becomes your entry, where you enter your trade.
It is important that you take a good look at your risk to reward ratio. You want to use a stop loss that is smaller than your potential profit.
How to determine stop loss and take profit for swing trading in an up trend
First find the lowest point of the pullback to place your stop loss. If price drops back to this level, you want your trade to close automatically and you take a loss.
To determine your take profit target, look for the high point of the recent uptrend. This point is where you want to close the trade automatically and where you take a profit.
Tip: You can also partly take profit (for example close 75% and move your stop loss to your entry (break even). You grab some profit and let the rest of your trade run without risk.
The difference between your entry and your take profit is your reward. The difference between your entry and your stop loss is the risk. To determine whether it pays off to take a swing trade, I try maintain a risk to reward ratio of 1:2 on average. This means that my potential profit must be twice as large as my potential loss. Higher is better, lower is worse.
The better your risk to reward ratio, the more trades you “can afford” to lose in order to be profitable in the long term.
In this example of the Adidas share price you see a clear overall uptrend. I have marked 4 trades. The entry is on the border between the red and green part. The stop loss is the bottom of the red and the take profit is the top of the green part.
Number 4 is the nicest in terms of risk to reward and #3 I probably did not take because the risk to reward is just too low.
You can also see here that with #1 you could have taken a part profit and let the rest run for a nice extra profit.
Example of swing trading in a down trend
Just like with an uptrend, a downtrend usually also moves in a zigzag pattern. For example, the price of a share may fall for a few days. After that the price rises a bit and then the down trend continues. The more often this is repeated, the better the down trend becomes visible.
The downward movement is the trend itself and the upswings are the pullbacks or retracements.
How to determine an entry for swing trading in a down trend
The same strategy for taking advantage of an uptrend is also used for a down trend, but vice versa. Again, it is difficult to predict how long a pullback or retracement will last. So you need confirmation that the down trend will continue before you open a swing trade.
A confirmation could be for example, when the low point of the previous day is broken at the bottom. This then becomes your entry.
How to determine a stop loss and take profit for swing trading in an down trend
First find the highest point of the pullback or last swing high to put your stop loss. If price rises to this level, you want your trade to close automatically and take a loss.
To determine your take profit target, look for the low point of the recent down trend. This point is where you want to close the swing trade automatically and where you take a profit.
Just like with swing trading in an up trend, your risk to reward is important.
I have also marked three trades in the example above. All of them are exellent in term of risk to reward and I actually took number 2 and 3 myself. The 2 pullbacks between trade 1 and 2 are too small to get a good risk to reward ratio.
What are the benefits of swing trading?
Swing trading is fairly easy to master and can be quite profitable if you maintain a good risk to reward ratio. In addition, it is possible to keep trades open for a long time by partly taking a profit, moving your stop loss to your entry and continuing to ride the trend.
- Easy to learn
- Let it ride (keep trades partly open for higher profits)
- No indicators required
- Medium term, so perfect for investors who do not want to look at their charts all day
Where can I learn to swing?
You can trade this strategy with every broker because you do not need complex indicators and because this strategy works in all markets. If you don’t have a broker yet, create a demo account below and learn how to swing trade without risking real money.
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Let me know in the comments what your results are with swing trading.