17 Feb 2017
Swing Trading Trends & How to Use Them
Swing Trading is a shorter term trading strategy that is popular among FX and CFD traders. Swing Trading positions are typically held for a matter hours though traders may hold the position for longer under the right circumstances. The aim of Swing Trading is to firstly identify and confirm a trend, then to enter a trade and capture as much of the upward or downward movement of that trend as possible. For example if the price of Gold started to trend higher from $1329.00 per ounce and you enter a long (or buy) trade at $1330.00, in a size of one micro lot. Subsequently over the next 30 minutes, the price of Gold rises to $1340.00. At which point you close your trade. You will have captured 1000 ticks ( or minimum price increments) each of which is worth US$1.00 creating a profit of $1000.00 on the trade. Swing Trading often utilises Technical Analysis to confirm entry and exit points for a trade. Swing Traders will often want to see key price points or support and resistance levels broken, before entering a trade. They will use other indicators to monitor the health of trend and to alert them to any change therein.
Trends and RangesSwing Trading is often seen as a trend following strategy. Such that If the price of a financial instrument is in an upward or rising trend, then Swing Traders are likely to open a long position in that instrument. In expectation that the uptrend or move higher will continue, allowing them to make a profit. However if the prevailing trend in that instrument is downward ie the price is falling. Swing Traders will likely open a short position or sell order, in the belief the price of the instrument will continue to fall. And that they will subsequently be able to close their short position at a profit. More experienced Swing Traders may also look to trade the ranges in an instrument that is not in clear up or down trend. But whose price is moving in a band between support and resistance levels. However it is the break out of such a range that will elicit the most interest from Swing Traders. As this breakout may confirm the start of a new trend or trading opportunity. The graphic above shows the price action of a security as it trades in just such a range between clear lines of support and resistance. However the price of the security ultimately breaks below the line of support, initiating a new downtrend.
Identifying Trends in Swing TradingThe prices of financial instruments rarely move in straight line. Rather they oscillate reflecting changes in supply and demand and investor sentiment as they do so. These variations in price come together to form the characteristic chart patterns so beloved of technical analysts. Technical analysis can be complicated. However we can use a simple rule of thumb to help determine if the price of an instrument is in a trend and if so what that trend is.
UptrendsAn uptrend can be described as a series of consecutive higher highs and higher lows. In other words it can be clearly seen that the price of the security is moving higher during the observation period of our chart, be that on a 5 minute or daily time frame.
DowntrendConversely, a down trend can be thought of a series or progression of lower lows and lower highs. In this instance the price of the security is moving downward during our period of observation or time frame.
Monitoring Trends in Swing TradingModern charting packages, such as the one contained in our platform Blackwell Trader MT4, record information about a security's price action during a given period. Tracking the Opening price, the High and Low prices during the period and the Closing price at the end of the period. This data can then be represented in the securities chart. Most commonly in a Bar or Candlestick chart format. These charts can provide both a visual a data driven view of a securities price performance. See below
A Spot Gold 15 minute candlestick chart with a data window via MT4Swing Traders who are looking for an upside or bullish breakout will want to see upside momentum. For example an initial break higher that is followed by a pullback or countertrend move. Which itself is superseded by a further move higher. Particularly if we post a new higher high in this third leg. Such a move may constitute confirmation of the trend as far as the bullish Swing Trader is concerned. If so they will open a long position or buy, accordingly. An example of this type of price action can be found in the graphic below. The art of successful Swing Trading is identifying and confirming the start of a new trend or the continuation of an existing one. This is achieved by scrutinising the price action of security or instrument and only trading when there is a very high degree of probability that a genuine trend is in place.
False signalsSwing Traders will ideally not wish to participate in a false breakout. But will be alert to the possibility and will often use a stop loss order to protect themselves against such an eventuality. Having entered a trade on the long side after the type of confirmation noted above. The Swing Trader may well have placed a stop loss just below the counter trend low, as a pull back or correction to such a level (a lower low) would infer that this was indeed a false breakout.
Swinging in the other directionHowever as we have noted above a series of lower lows and lower highs also constitutes a downtrend. So whilst we may have seen a false breakout on the upside. The new lower low could also herald the start of a new downside trend. Confirmation of this trend could come in the form of the instruments failure to trade above the new lower high, associated with the counter trend low. Followed by a further new, lower low. We can see an example of just such a countertrend and downside breakout in the image below. These are the kind of inflection points that Swing Traders are looking for. Note though that they will often want additional confirmation of a trend reversal, so as to avoid being “topped and tailed” that is stopped out at both ends of the trade.
Practice makes perfectSuccessful Swing Trading relies on recognizing and reacting to both genuine and false breakouts. In order to be on the right side of the trend and to minimize any losses, if you are wrong footed, so to speak. A very practical way to familairise yourself with market movements and to refine your Swing Trading strategy is to use one of our free Demo Trading accounts. Which accurately simulates real market conditions, without you having to risk any of your own capital. Once you're satisfied that you have sufficient knowledge and a robust trading strategy you can move over to the real trading environment with our Live account.
Tips on Swing Trading for those new to Swing Trading
- Be patient remember you are looking to capture the majority of a move not just a few pips
- Await confirmation before jumping in. Always let the market tell you that it's changing direction or breaking a key level (support or resistance).
- Think carefully about the placement of your stop loss relative to recent price action. As you won't want to be prematurely stopped out but neither do you want to take undue risk.
- You can raise or lower your stop loss behind a trade as it moves in your favour.
- Always keep a record of why you entered a trade, what your confirmation signal was, where you placed any stoploss and takeprofit levels etc. You can look back on this record and review what went right or wrong.
- Try to trade only when you believe the odds of success are very much in your favour.
- Most important of all practise as much as you can on and formulate your strategy before committing to real trading.
Some pointers for more experienced Swing Traders
- If not doing so already consider adding indicators such as Relative Strength (RSI) and or Bollinger Bands to your charts. Both of which can shed light on trend strength and likely longevity as well possible failure or breakout points.
- Alternatively the more sophisticated Stochastic Oscillators can be used to track market momentum independently of price or volume. These indicators can be customised by Blackwell Trader MT4 users to suit their own strategy or style.