👉 What is swing trading and what strategies to use. Examples

⇒ Warning. Any strategy does not guarantee profit on every trade. Strategy is an algorithm of actions. Any algorithm is a systematic work. Success in trading is to adhere to systematic work.

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Swing trading (swing trading, свинговая торговля) is a method of trading on financial markets that involves holding a position for several days or even weeks. It aims to profit from expected “swings” – price fluctuations that form longer trends than intraday impulses. This usually happens against the backdrop of significant news.

The concept of swing trading was introduced by J. Douglas Taylor in his book “The Taylor Trading Technique” (1950). Taylor analyzed the directional movements of the market, breaking the sequence of candles into individual cycles.

He described his theory of the “three-day cycle,” highlighting buying and selling days, which became the foundation for swing trading.Swing trading does not guarantee profit, but it can enhance your experience in financial markets if active intraday trading does not suit you for some reason.

Swing trading allows traders to find a unique balance between the frequency of trades, commission costs, emotional stress, the number of instruments tracked, and the time spent on analysis.Swing trading involves higher risks as it requires wider stop-losses to account for volatility. A swing trader may also face the need for a higher starting deposit to hold positions overnight.

Who is swing trading suitable for?

Swing trading is suitable for those who want to maintain an active presence in various markets without dedicating all their working time to it. Let’s list several categories for whom this type of trading is optimal:

Busy professionals
Swing trading does not require constant market monitoring throughout the day, allowing traders to combine trading with their primary job. For example, Dr. Alexander Elder successfully combined his career as a psychologist with trading.

Beginner traders
Swing trading is less stressful compared to day trading and does not require quick decision-making. This trading style allows beginners to gradually assimilate the basic principles of analysis and learn to manage risks, which is optimal for newcomers.

Investors
For instance, if you hold a long-term position in cryptocurrencies but observe signs of weakness near a significant resistance level, anticipating a correction in the coming days, you can open a swing short position without selling your long-term position. Thus, swing trading enables more efficient use of capital compared to long-term investments.

Enthusiasts of various analysis methods
Swing trading allows traders to combine technical analysis (such as chart patterns) and fundamental analysis (the reaction of prices to important news releases).

Do you want to understand if swing trading is suitable for you? Then keep reading – we will analyze the pros and cons of this trading style and explore the most effective strategies through examples.

An example of a swing trade:

In swing trading, the primary focus is on daily and 4-hour charts, though smaller timeframes can also be used to refine entry points and/or gain additional confirmation.

Example of a swing trade in the futures market:

Imagine a swing trader notices a steady uptrend that unfolded in late April and early May (this period covered using a graphical tool for arbitrary profile) in the E-mini S&P 500 futures market.

During an upward movement, two peaks formed on the profile at levels 5245.00 and 5212.00 (marked with turquoise lines). Let’s say a swing trader placed 2 buy-limit orders there with stops at 5233.50 and 5199.75 (marked with light brown lines), anticipating that the uptrend would continue after testing these significant volume levels.

As charts often show, prices frequently react to such levels.

Returning to the example: Near the previous peak formed in late March, the uptrend slowed, and fundamental news about weak US labor market conditions led to subsequent price declines, triggering the execution of 2 buy orders:

Swing trade long #1 was closed at a stop-loss (minus 46 ticks) the day after opening.
Swing trade long #2 may still be active (+650 ticks), for instance, using a trailing stop.

Example of a swing trade in cryptocurrencies:

During a sharp price surge starting on February 26 in the Bitcoin market (as shown by an 8-day profile), two noticeable peaks formed (marked with turquoise lines).

A swing trader could have placed limit buy orders (with protective stops around the orange lines where the profile thins out), expecting the price to turn upward if it retraces to these peaks.

The calculation turned out to be correct: in both cases, there was an upward reversal without triggering the stop losses (although for the second setup to work, the swing trader had to wait for 2 months – quite a long time for a scalper).

Closing a position can be done:

→ near important resistance levels (horizontal or sloping);
→ using trailing stops;
→ mathematically, for example, setting a stop loss so that the potential reward exceeds the risk by 5-10 times;
→ using other methods.

WHAT INSTRUMENTS ARE USED IN SWING TRADING

Reliable instruments are a way to maintain stability in the conditions of intense competition in markets, where your profit often means the loss of another participant in trading.”

Well-applicable tools:

Market Profile: Allows analysis of trading volume distribution at price levels, identifying key support and resistance levels. Helps determine where the main zones of market activity and interest of market participants were located.
Price Alerts: Allow traders not to miss important moments for entry or exit from a trade, while engaging in other activities without tracking price dynamics.
Volume and Delta: Contribute to assessing the market in terms of effort and result, helping to judge the balance of supply and demand.
Footprint Charts: Show information “inside candles” about trades, including volume and direction, at each price level. For example, footprints on a daily timeframe can be valuable for swing traders.
Margin levels: Margin zones typically serve as important support and resistance levels.
Non-standard types of charts – for example, ranges. They allow filtering out market noise and focusing on changes in short-term trends.
ZigZag Pro indicator: Allows breaking down candle sequences into waves, including statistics for each wave.
Wave analysis: Elliott Wave principles and other wave analysis tools can be used on higher timeframes to determine the current stage of the market and the potential direction of the next swing.
Economic calendars: Provide information on upcoming economic events and indicators that could impact markets.

Highly sensitive Order Flow indicators:

For instance, Depth of Market (DOM), which displays market depth, order volumes for buying and selling at different price levels. While beneficial for scalpers due to its ability to reflect instantaneous market activity, it is less effective for swing trading because market conditions change rapidly.
Indicators reflecting order book activity: These can assist swing traders in finding precise entry points (thus reducing risks), but they are unlikely to alter a trader’s market perspective over a period of several days or weeks.
Moving Averages (MA) for swing trading: Tools like moving averages and oscillators have debated effectiveness and cannot be recommended as reliable aids for making trading decisions. Research indicates their predictive ability is often limited.
Trading rules based on MACD and RSI indicators: Trading strategies relying on indicators like MACD and RSI do not always effectively predict price movements across various markets. This data confirms that while technical indicators can be useful under specific market conditions, they often generate false signals.

Swing Trading: Types of Strategies

Let’s consider the strategies applied by swing traders. For convenience, we will divide them into 2 key categories:

Trend Trading.
Counter-trend Trading (essentially involves trading against the trend).

Swing Trading with the Trend

Trading with the trend involves traders buying assets during an uptrend and selling during a downtrend. Let’s explore the two scenarios commonly used for entering positions:

Breakout Entry: This involves buying on a breakout above resistance during an uptrend or selling short on a breakout below support during a downtrend.
Pullback Entry: This strategy entails buying during temporary price dips in an uptrend or entering a short position during temporary price increases in a downtrend.

Breakout Trading

Breakout trading assumes that after breaking through a key level (resistance or support), the price will continue in the breakout direction, potentially offering profit opportunities as the trend develops.

Example: Bitcoin and ETF Approval

The anticipation of SEC approval for a Bitcoin ETF was a significant factor that defined the BTC/USD uptrend in late 2023. The official decision was made on January 11th, during which the market was highly volatile (circled in #1 on the daily footprint below) with Bitcoin surpassing the $49,000 mark per coin.

However, then the principle of “buy the rumor, sell the fact” came into play, and the market began to “cool off,” leading to a decline below the $40,800 level, which had previously acted as support.

In this scenario, a swing trader could have assumed that after the “blow-off” pair, the uptrend would continue, as ETFs expand access to Bitcoin investments for a broader audience, including institutional players.

Let’s highlight 2 setups for a swing trader to act on the breakout buying method:

A buy-stop order placed slightly above $40,800 – this level could be considered a key breakout point where bears exerted significant effort (as evidenced by volumes on the footprint, indicated by #2).
A buy-stop order placed slightly above $44,000 – this level appeared as resistance, but on February 8th, the balance between buyers and sellers shifted above it (as seen in volumes on the footprint, indicated by #3), suggesting a shortage of sellers and continuation of the uptrend.

Example: Gold Price and the Israel Attack

In late September 2023, the gold market established a downtrend – prices dropped from $1950 to $1833. The profile covering the period of price decline shows a bulge around the $1833 level (1), reflecting a strengthening balance of supply and demand. Apparently, gold at $1833 attracted buyers due to:

High inflation prevalent in Western countries in 2023.
Demand for gold from central banks, including the People’s Bank of China.

The protrusions on the profile (marked with numbers) could signify resistance levels that the price would encounter in attempts to rise from the balance zone (1).

On October 7, 2023, there was an attack on Israel by Hamas. On October 8, trading in gold opened with a wide bullish gap (indicated by the arrow), surpassing the resistance level (2) around $1863 per ounce. A swing trader could:

Assume that the escalation in geopolitical tension (in addition to the factors mentioned above) would be a significant driver.
Buy gold above the $1863 resistance, anticipating that the price would not fall below the gap area.
Continue buying on breakouts above resistance levels 3 and 4.

As events unfolded, the price of gold surged to a historical high.

Example from the MSFT stock market: As shown by the long-term trend, the value of one of the market leaders by capitalization has been increasing year after year. A swing trader can utilize this trend to buy MSFT stock at the beginning of an anticipated upward swing.

The daily footprint chart illustrates how this may look:

Digits show:

A decline (1) on high volume. This occurred after the Federal Reserve left interest rates unchanged at the September meeting and signaled intentions to maintain high rates longer than expected by Wall Street to combat inflation.
The expanding triangle downwards (shown by black lines) indicates a conditional limit buyer in the market who prefers to accumulate fundamentally strong stocks during September 26-28, preventing them from dropping below $310.
Upward movement with a test (2) of the high volume level from September 21-22 confirmed buyer activity, and subsequent decline on October 3 failed to establish a new low.
(3) – an inside bar, which can be interpreted as indecision.
(4) – a bullish breakout of the resistance zone (2), which a swing trader could use to enter a long position, anticipating that the balance of supply and demand shifted upwards and the price would not drop below the inside bar. Footprint signals provided confidence for breakout entry.

Trading on Pullbacks

In this approach, it’s crucial for a swing trader to consider the current trend and enter trades after a correction in the direction of this trend.

Two examples of buying on corrections (pullbacks) to the high volume level were shown earlier. Let’s add another example with initiating a short position.

Example: Silver market, daily timeframe. Cluster chart reflecting events in the first half of 2024.

During those days, a swing trader’s attention might have been drawn to the breakout of the psychological level at $30 per ounce of silver and the establishment of a multi-month high.

However, what happened next?

Fact 1: Formation of a convexity on the profile above the level of 31.50.
Fact 2: Formation of a series of lower lows and lower highs, noticeable according to the ZigZag Pro indicator.
Fact 3: The price decline to the June 3rd low had higher volume and more ticks than the rise to the May 28th high. This indicates that sellers are taking initiative in conditions of demand deficit.

Therefore, testing the high volume level (around $31.5 per ounce of silver) was a justified attempt by the swing trader to open a short position, anticipating that the price would not sustain at multi-month highs, leading to a significant decline over the next few days or even weeks.

Swing Failure Pattern

On the internet, you can find the Swing Failure Pattern (SFP) trading method, which can also be applied to swing trading along with the trend. The method (credited to Thomas Dante) suggests:

Buying after a false bearish breakout of the previous swing low in an uptrend.
Selling after a false bullish breakout of the previous swing high in a downtrend.

Example: Euro futures market, 4-hour chart.

The market profile shows that the balance of supply and demand changed with the price decline A→B. This could have been related to the beginning of the new year (or low liquidity and vulnerability to manipulation during Christmas days). The formation of peak (1) around the 1.102 level indicated that the market was not ready to move higher. The false breakout of peak (1), which formed a slightly higher peak (2), represents the Swing Failure Pattern, indicating a failed new uptrend.

Such price behavior suggests the prospect of further decline, which was initiated by impulse A→B.

Simply put, to sell based on the Swing Failure Pattern signal, you need to:

Wait for a strong bearish impulse.
Identify the formation of an intermediate peak (first pullback).
Enter a short position after a false bullish breakout above the peak of the first pullback. If the breach above the first peak is short-lived, it confirms the SFP pattern.

Such a false breakout may be engineered to deceive market participants and give them reasons to believe that the price is ready to rise. Consequently, buyers rush into long positions, while sellers cover their shorts with stop orders. However, both parties end up disappointed when things don’t unfold as expected.

Similarly, the reverse scenario can be observed on the daily chart of BNB/USDT.

The numbers indicate:

An uptrend.
Intermediate low.
False breakout of the previous low and a signal to enter long.

In highly volatile cryptocurrency markets, a false breakout can occur within seconds, leaving little opportunity for a patient swing trader to enter with a limit order. Nonetheless, the Swing Failure Pattern is a viable strategy applicable not only to cryptocurrencies, offering a high potential reward-to-risk ratio.

TRADING THE TREND REVERSAL

Trading the trend reversal involves identifying and utilizing moments that suggest any change in the primary direction of price movement in the market. This can occur:

When the drivers propelling the main trend lose strength (the trend fades).
When new drivers emerge that “accelerate” a new trend in a direction opposite to the previous primary trend.

Example: Nasdaq 100 E-mini Futures Market (NQ)

In the screenshot, a daily footprint reveals that:

Up until mid-April 2024, the price moved within the boundaries of channel 1-2. However, on April 11th, there was a bearish breakthrough of the lower boundary (2) leading to a decline towards the parallel channel boundary (3).

How to combine swing trading with the strategy of parallel channels?

The arrow with the number 4 indicates the day (April 19th, Friday) with unusually high volume. Presumably, this was panic and a culmination of selling with the Point of Control (POC) at 17285. Notably, the price opened the following week with a bullish gap and moved above this POC, confirming the thesis of a selling climax – a bullish sign.

A swing trader could have inferred that the volume spike and the subsequent 2-day rally suggested that a significant player anticipated further upside. Therefore, when the price dipped on April 24th with a convexity formation (indicated by the circle), the swing trader might have seen it as an opportunity to enter long, considering:

This could be classified as trading against the trend, as many indicators since late March indicated a downtrend.
The calculation might have been that the price wouldn’t drop below Monday’s gap and the POC level from Friday, April 19th.

Example: Pound Futures, 4-hour chart.

Arrow 1 shows active price growth. Consequently, this rise could have attracted retail buyers who entered long positions, setting stop-loss orders below the wave’s minimum.

A savvy swing trader might have set an alert in case the price decreased to this level – such a decline (2) occurred on June 7th, 2024, following the release of US labor market news.

The circle with the number 3 indicates a false breakout of the previous local minimum. How could a swing trader interpret this?

Activation of retail buyers’ stop-loss orders and accumulation of long positions by professionals. Therefore, a swing trader could have opened a trading platform and entered a long position at the level of the previous minimum, anticipating that the breakout would be false. Of course, setting a stop-loss and take-profit in an acceptable risk-to-reward ratio.

On June 12th, the opposite situation occurred: the price exceeded (4) the previous local maximum from which a sharp decline had started. The reasoning for a swing trader would have been the same but mirrored:

“The price activated stop-losses of sellers who opened short positions during the decline (2).”
“Conditional professionals are working on building short positions through stop-losses of retail sellers.”
“I am also opening a short position, betting that the breakout of the maximum will be false.”

It’s worth noting that such a strategy for swing trading against the trend can be risky for beginners. However, it offers an attractive risk-to-potential-reward ratio, making it practical for those who can tolerate higher levels of risk. This approach works well for individuals who have the personal qualities necessary to manage such risks effectively.

Advantages of Swing Trading

Moderate Time Commitment: Requires less time for analysis and monitoring positions compared to day trading. Traders can dedicate a few hours per week to the market, making it feasible to combine swing trading with a primary job.
Moderate Volatility: Swing trading does not require reacting to every instant market fluctuation, unlike day trading, which helps in managing emotions and making more deliberate trading decisions.
Potential for Significant Profits: Trends in swing trading can persist longer than expected, allowing for substantial profits by capitalizing on short-term trends and market fluctuations.
Flexibility in Instrument Choice: Suitable for trading a variety of financial instruments including stocks, currencies, futures, and cryptocurrencies, providing traders with diverse market opportunities.
Variety of Strategies: Offers the flexibility to employ different trading strategies such as breakout trading, pullbacks, and trend-following, enabling traders to adapt to various market conditions effectively.
Transaction Costs: Transaction fees and costs in swing trading have less impact on overall profitability compared to shorter-term trading strategies. However, it’s essential to consider these costs when planning a trading strategy.

Swing trading combines the advantages of flexibility and potential profitability with a moderate time commitment, making it appealing to traders looking to balance trading with other professional or personal commitments.

Disadvantages of Swing Trading

Capital Intensive: Swing trading requires a larger starting capital due to wider stop-loss orders to withstand price fluctuations typical in swing trading. This capital requirement may also necessitate holding positions overnight.
Gap Risk: Holding positions overnight or for several days (or weeks) exposes traders to the risk of price gaps caused by unexpected news events.
Forecasting Requirement: Effective swing trading demands comprehensive market analysis, encompassing both fundamental analysis and technical analysis. Errors in judgment or analysis can lead to losses.
Psychological Pressure: While generally less emotionally demanding than active day trading, swing trading still involves stress, particularly during periods of high volatility or anxiety over holding positions overnight.
Continuous Learning Requirement: Swing traders need to continually update their knowledge and skills to adapt to market changes, requiring ongoing education and staying abreast of market developments.

Swing trading offers flexibility and potential profitability but comes with significant challenges related to capital requirements, risk management, market analysis, psychological resilience, and the need for continuous learning and adaptation. Traders must weigh these factors carefully when deciding whether swing trading aligns with their financial goals and risk tolerance.