Best swing trading strategies and techniques
What is a swing trading strategy?
Swing trading itself is not a strategy, but rather a trading style. It involves capturing short- to medium-term price movements to generate a profit, and positions are usually held for several days to several weeks.
An advantage of swing trading is that various strategies can be applied virtually to any asset class. In this article, we will explore several popular strategies and explain how swing traders can identify which one works best for them.
Best swing trading strategies
- Breakout trading
- Trend trading
- Countertrend trading
- Moving averages
- Support and resistance
- Technical indicators
Breakout trading
Breakout trading is all about momentum. Traders enter a position when the price of an instrument breaks out of a previously defined trading range or above a key support / below a key resistance level. The idea behind it is to capture a potentially strong price movement after the breakout occurs. Some traders wait for the breakout to happen and enter the trade manually, while others will have limit orders lined up in case a breakout occurs.
For this type of strategy, traders tend to use classic support and resistance levels. Additional indicators might be used, such as the RSI, to avoid buying when markets are in overbought territory or selling when markets are in oversold territory. Bollinger Bands might be used as an entry signal for breakout trading.
Trend trading
Trend trading is a strategy that involves identifying the current trend in the market and trading in its direction. If an asset is currently in a bull market, traders will be looking for dips/retracements for opportunities to buy. On the other hand, in a bear market traders will be searching for rallies to sell. Ideally, they will ride the trend until it is over. In practice, spotting when a trend has actually ended is only easy in hindsight.
There are multiple tools and strategies traders can use to ride the trend.
Countertrend trading
As the name suggests, traders using countertrend strategies go against the trend. They trade against the current trend to profit from smaller reversals.
A popular strategy is to use classic support and resistance levels in combination with a technical indicator.
For example, let´s have a look at the USD/JPY chart below. The currency pair is clearly in an uptrend. However, we can draw key resistance levels to identify levels where it might turn. An indicator such as the Relative Strength Index (RSI) can help us additionally to identify when the currency pair is in overbought territory. An even stronger signal is generated when there is an RSI divergence (the price is posting higher highs, but the RSI is posting lower highs). In summary, the strategy consists of:
- Identifying the prevailing trend (uptrend or downtrend).
- Identifying key support and resistance levels.
- Plotting the RSI on the chart to identify overbought/oversold conditions.
- Uptrend = sell when the price reaches a key resistance level + RSI is signalling overbought conditions.
- Downtrend = buy when the price reaches a support level + RSI is signalling oversold conditions.
Moving averages
Moving averages are a popular technical indicator that smooths out price data over a specified period. They can be used as a tool to help visualize the underlying trend, identify support and resistance levels, and for actual entry and exit signals.
A popular trend-following strategy is moving average crossovers. When a short-term moving average crosses above a longer-term moving average, it is considered a bullish sign (i.e., that the instrument is entering an uptrend). On the other hand, when a short-term moving average crosses below a longer-term moving average, it is considered a bearish sign (i.e., the instrument might be entering a downtrend).
A popular combination - especially for swing traders - is the 50 and 200 moving averages applied on the daily chart. Traders can use the crossover as an entry signal or use it as a sign to start looking for opportunities to either buy or sell, with additional tools being used to specify the exact entry point.
Support and resistance
Support and resistance are levels where historically, significant buying or selling pressure has occurred. A support level is a point where enough buyers step in to prevent prices from falling further. On the other hand, a resistance level is a point where enough selling pressure exists to prevent prices from rising further.
Support and resistance levels can come in various forms, such as simple horizontal lines, Fibonacci retracement levels, moving averages, pivot points, or psychological levels (for example, round numbers).
Support and resistance levels are used by swing traders as supporting tools for determining entry/exit levels or it could be a complete strategy on its own, especially amongst traders that prefer "naked charts", i.e., avoid the usage of indicators and similar tools.
When following a trend, swing traders will be anticipating retracements to key support or reversals to key resistance levels to buy/sell the specific instrument.
Technical indicators
Technical indicators are used as supporting tools (e.g., to help traders make decisions) but can also represent the core of a trading strategy. As a supporting tool, traders might use them to identify overbought/oversold conditions, identify the prevailing trend, or gauge the current momentum. There are several indicators with which traders can build a trading strategy. Some of the popular trend indicators are:
- Bollinger Bands
- Moving Average Convergence Divergence (MACD)
- ADX (Average Directional Moving Average)
- Parabolic SAR
- Ichimoku Kinko Hyo
How to choose the best swing trading strategy?
It is important to understand that there is no "best" strategy. Which one a trader will pick will ultimately depend on his/her trading experience, risk appetite, and personal preferences. Since markets are constantly changing, traders will likely have to adjust their strategy over time either due to it not working efficiently anymore or due to changes in preferences.
To pick the best swing strategy for you, you need to:
- Know your trading style: even within swing trading, there are different styles of trading. If you don´t, feel comfortable holding positions for longer than a few days, you may prefer a countertrend strategy where you are trying to profit from smaller retracements. On the other hand, if your time is limited, you may prefer to go with a trend-following strategy which may involve holding positions for several weeks.
- Invest time in education: even if you think you have found the holy grail strategy, it is important to continuously invest time in learning, as this is the only way to develop as a trader.
- Testing: a demo account is a safe environment in which you can test new strategies or changes to your existing strategy.
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The images shown are for illustration purposes only. This information is not to be construed as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product, or instrument; or to participate in any trading strategy. It has been prepared without taking your objectives, financial situation and needs into account. Any references to past performance and forecasts are not reliable indicators of future results. Axi makes no representation and assumes no liability with regard to the accuracy and completeness of the content in this publication. Readers should seek their own advice.
FAQ
What is the holding period for swing trading positions?
From a few days to a few weeks.
What markets are suitable for swing trading?
Swing trading can be applied to all types of markets, from currencies, stocks, and commodities to bonds and cryptocurrencies. Traders tend to gravitate to instruments that are liquid and have a sufficient amount of volatility.
What are the key elements of a swing trading strategy?
A swing trading strategy includes identifying trends or price patterns, determining entry and exit points, and managing risk. Technical analysis is often used to identify potential swing trading opportunities.
How do swing traders identify entry and exit points?
By using classic support and resistance levels or with the aid of indicators (such as Bollinger Bands).
How do swing traders manage risk?
By setting their stop-loss and take-profit orders in advance. They might be adjusted as the position is running, particularly if the trade is being held for a longer period of time.
