For a day trader who trades intraday price moves, the idea of keeping a position open for longer than the trading day can be too much to stomach. When I day traded commodities, I liked the feeling of cashing in at the end of the day and having money in my account to show for my day’s work.
For sure, taking a position home overnight requires a different approach to risk than that of a day trader. Position sizing will reduce while feelings like impatience and frustration can be amplified.
In truth, most traders come to swing trading from a stock investing background, they understand stocks, they recognize the names they see on CNBC, there’s a familiarity there that keeps them comfortable.
However, price swings occur in all instruments, stocks, bonds, forex, futures (commodities), cryptocurrencies. It doesn’t matter, so why limit yourself to stocks?
For many, the attraction of swing trading is that it can be worked in around a 9 – 5 job and other life commitments. Compared to day-trading, swing trading doesn’t require the same screen time however, work has to be done to get the trading system in place.
This trading system governs the trader’s entry and exit rules, the instruments the trader follows, the rules that are triggered when volatility increases or decreases, what happens during a drawdown and so.
The goal of this post isn’t to cover those aspects of trading (I go into a little detail in the Swing Trading Whitepaper that I’m giving away free). Right now we’ll cover the strategies themselves.
It Doesn’t Matter What Market(s) You Trade
The daily chart of a stock, futures or forex cross pair can often provide evidence of recurring patterns and tendencies. Broadly, these patterns are captured under the heading of technical analysis.
Some of the most popular swing trading strategies can be invisible in the noise of intra-day charts.
For example, the high and lows of the previous day may often be treated by traders as support and resistance. On other occasions, a retest of prior highs and lows might signal an impending breakout.
From this level, the price could continue an existing trend and be the basis for a simple swing trading strategy.
Besides the strategies themselves, the key takeaway I want I want this post to give is that it’s irrelevant what you trade. The stocks on the London Stock Exchange or NYSE or commodities on the CME in Chicago don’t care about whether you’re following them. They are simply vehicles for you to implement a strategy (and hopefully, make money).
IMHO, the more distance you can create between yourself and the market(s) you trade, the better. You won’t get married to any market which will leave you free to determine whether it’s one that offers a viable trading opportunity (at that moment in time) or whether it’s one that should be passed on until the next time you run your system.
Swing Trading Strategies
What are EMA Crossover Trading Strategies?
A commonly used swing trading method is the Exponential Moving Averages (EMA) crossover strategy.
Forex swing traders might refer to this strategy as the forex EMA crossover strategy, However, we should remember it is not limited to just currencies. Any instrument, whether stocks, futures, options or cryptocurrencies, can be traded using the EMA crossover strategy.
With this swing trade strategy, typically, traders might use 4 hour or daily charts.
Like all moving averages, the EMA is an average of the previous candlesticks’ closing price. However, unlike the Simple Moving Average, the Exponential Moving Average formula places greater importance on more recent candlesticks.
The EMA crossover is perhaps the simplest strategy; it requires two EMA lines.
Frequently, the 20 and 50 periods EMA is on the swing trader’s chart. That is to say, the chart will have two lines representing the average closing prices of the 20 candlesticks. The same for the 50 EMA line.
The “shorter” the period, the more sensitive to price, the EMA is. The swing trader’s backtesting should indicate which are the optimum periods to use. That said, the swing trader should be careful not to “over-optimize” their backtesting.
However, as an example let’s place the 25 and 50 EMAs on the Australian Dollar futures contract, daily chart.
Remember, in calculating an average price, EMAs give greater importance to more recent time periods. The fewer time periods are used, the greater that proportional weighting will be.
By using two lines, with different time periods, we can get a good idea of how fast price is changing and when it is likely to change direction.
Moreover, since the 25 and 50 EMAs are frequently used by swing traders, they are also the most likely to be useful indicators of support and resistance.
Any crossover of the longer-term EMA, in this case, the 50, by the shorter-term, the 25 will give a clear visual indication of a potential swing point. An upward cross is a bullish signal; a downward cross is bearish.
Nevertheless, as with all these trading strategies, we’re not going to be relying on just a single indicator.
The underlying price action is what really matters. We’ll look to candlestick patterns to confirm that a new swing high or low is forming.
These may be patterns that form over a number of days, or single candles such as hammers, inverted hammers, or dojis.
But these are signal candles only, so we will look for a subsequent buy or sell candle, which will be the first to close above or below the 25 EMA.
How to Use the Average True Range (ATR) for Stop Loss
To set our stop-loss, we will use the Average True Range (ATR), a standard measure of volatility, that can easily be viewed on charts. A cautious stop will be 100% of the ATR, in pips, above or below the 50 EMA.
More aggressive swing traders may use as little as 50% of ATR, and that’s fine. There’s really no right or wrong figure.
All that really matters is that you stick to the risk and reward ratios set out in your trading plan. For comparison, it’s worth noting that day traders frequently work with stops as tight as 10% ATR.
Additionally, we need to set out stops at odd dollar amounts to avoid institutional stop hunters.
For our profit targets, we will look at the next significant level of support or resistance. We’ll aim to exit the trade just before that level is reached. Thus, we hope to avoid the risk of another swing point, turning the trade against us.
An alternative exit strategy is to wait for the first candle to close above or below the 50 EMA. This might be used as a signal that the move is over.
It’s up to each individual to decide what is an acceptable risk/reward ratio. But the important thing is to observe our own risk management rules at all times. If you’ve set a minimum of 1:2 in your trading plan, then don’t depart from it, no matter how enticing a set-up may look.
How to Use Fibonacci Retracement for Swing Trading
The Fibonacci retracement strategy is based on the Fibonacci sequence of numbers in which each new number is the sum of the previous two. The sequence therefore begins – 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89 etc.
This sequence often occurs in nature. It has also been widely used in computer algorithms. But, fortunately, there is no need for us as traders to understand the mathematics that makes it useful.
All we need to know is that certain percentage retracements, based on the Fibonacci sequence, have been found to be useful predictors of future support and resistance levels.
0% represents the swing high or low before any pullback or retracement has happened. The 100% level indicates a complete retracement to the previous swing high or low.
The intermediate levels, which are of most interest to us, are 23.6%, 38.2%, 61.8% and 78.6%. A 50% level, though not strictly derived from Fibonacci, is also commonly used in swing trading.
It’s important to note that there is nothing magic about these levels in themselves. It’s just that experience has shown them to very common reversal levels.
Many swing traders, including the big institutions, watch them closely. They, therefore, become to some extent, self-fulfilling prophecies.
In practical terms, we will look to identify swing highs or lows on the daily chart and then use our Fibonacci drawing tool to place the lines it will automatically generate at the % retracements listed above.
We will then wait for the price to approach these levels, but as with all strategies, we will look to the candlestick formations to confirm what our indicators are telling us about the price action.
Single candles such as hammers, inverted hammers, or dojis may all suggest an impending reversal. That said, these kinds of formations can be a trap for the unwary.
Therefore, so we will look for confirmation from a subsequent buy or sell candle. This will be the first to close above or below the relevant Fibonacci line.
One of the advantages of these trading strategies is that they allow for more generous stop-losses than intra-day trades.
In this case, a suitable placement will be a number of buffer pips above or below the high or low of the signal candle, depending on the direction of the move.
We are assuming, of course, that this allows the trade a suitable risk/reward ratio in accordance with our risk management rules.
Continuation Pattern Strategies
It might seem counter-intuitive that swing traders would be trend traders. But in fact, no trend is ever a straight line.
There are always pullbacks (swings) within trends that offer attractive entry opportunities.
We can either enter as the pullback begins – a swing high in a bull trend – or look to get in as the underlying trend looks set to resume – a swing low in a bull trend.
Both can be highly profitable trades, but all available statistics suggest that going with the trend is the best and safest option.
So with this strategy, we will look for continuation patterns, such as flags, pennants, triangles, and cup and handle.
It’s important to understand, though, that as swing traders we will be looking for sharp pullbacks, because the stronger the move into support or resistance levels, the stronger the reversal is likely to be.
A more horizontal consolidation, or a step series of lower highs or higher lows, is usually going to be less than optimal for swing traders.
Our stop losses will have to be too tight, and the ratio of risk to reward is unlikely to be good enough for long-term profitability.
For these reasons, pennants and sharply ascending or descending triangles are likely to be much better swing trading patterns than the more horizontal flags or symmetrical triangles.
And if we are going to look for cup and handle patterns, we will want to see a distinctly upwardly or downwardly sloping rather than a horizontal handle.
Bull Pennant Trading Strategy
How to Swing Trade Bull Pennants
So in the example below, from the EUR/GBP daily chart, we can see that the swing high was followed by two strong bearish candles and then a doji indicating indecision. The next candle is a bearish inverted hammer, with a long upward wick, which evidences a false breakout.
This fake-out might have trapped some incautious traders, and we can clearly see that the safer entry would have been to wait for the first bull candle to close above the pennant.
After this, the bull trend resumed with great momentum and a seven-day upward move – an excellent swing trade.
Cup and Handle Chart Pattern
How to Swing Trade the Cup and Handle Pattern
To identify a cup and handle pattern, we will look for a swing high forming the left rim of the cup, followed by a pullback into a flat or gently curving bottom before price recovers to form a second swing high – the right rim of the cup.
In the ideal pattern, the two swing highs will be at the same price level, but in practice, they will more often form at similar but slightly different prices. And this is perfectly acceptable to trade.
From the right rim, we will then look for the price to pull back to form the handle of the pattern. As noted above, the handle should ideally slope sharply downwards, as we are looking for a strong move into support. A horizontal consolidation is less attractive for swing traders.
That said, we do not want to see the price drop below the “half-full” level of the cup, as this is a sign that the pattern is breaking down.
So in the example below, from the EUR/USD daily chart, we see a sharp pullback in the handle, which ends with a doji at around the halfway level of the cup. Price then reverses strongly, offering us an attractive entry and a six-day bull run.
A simple and conservative stop-loss will be at 100% ATR below the low point of the handle. Of course, risk and what is defined by conservative is ultimately determined by our account size.
The Reversal Patterns
The trend is your friend” is one of the best-known sayings in trading – and with reason.
There’s no doubt that riding a strongly established trend is one of the best and safest routes to profitability.
But markets only trend around 20% of the time. So if we are to maximize our opportunities, we need to have some swing trading strategies in our toolbox. Doing so will allow us to trade profitably when trends are breaking down or chopping sideways in a range.
And that means knowing some reversal patterns and strategies.
Head and Shoulders Chart Pattern
How to Swing Trade the Head and Shoulders Trading Strategy
One of the most popular and reliable of these is the head and shoulders, which indicates a bullish or bearish reversal.
By definition, this kind of pattern develops over a number of days, and the joy of swing trading is that they give us plenty of time to watch this happen on the daily chart.
Initially, we will look for a strong bull move to a first swing high, followed by a horizontal or downward diagonal consolidation to form the left shoulder.
Price then rises again before falling back sharply from the second swing high – the head.
Another horizontal or downward diagonal consolidation then forms the right shoulder before price finally drops away in a new bear move.
The stronger the slope of the right shoulder, the better. But what’s really crucial to successfully trading the head and shoulders is to identify the neckline – the level of support that connects the lows of the two shoulders.
In a perfect pattern, the neckline will be close to horizontal. But in the real world, there will often be a slight slope.
Entries and Stops
An aggressive entry will be on the break of this line. More cautiously, we can wait for the first candle to close below it.
We can place a conservative stop 100% ATR above the high of the right shoulder. But it’s our choice to go tighter if we want.
As we’ve already discussed, one of the great things about all these trading strategies is that we get time to make these decisions.
The EUR/USD trade below, for example, though far from a picture-perfect set-up, still resulted in a strong three-day swing and an excellent profit opportunity.
The head and shoulders may indicate the end of a trend or a swing within a range. And we can also look to an inverted head and shoulders pattern – simply the above in reverse – to indicate the bullish reversal of a strong bear move.
Double Top and Bottom Chart Pattern
How to Swing Trade a Double Top or Double Bottom Chart Pattern
Double top or bottom patterns can also be used to indicate reversals at the end of trends or in ranges, and they provide one of the simplest swing trading strategy of all.
Both patterns consist in essence of two failed attempts to break a level of resistance (double top), or support (double bottom). So, double tops typically form a pattern resembling a letter M, double bottoms a W.
As always, these patterns are seldom perfect, and the support and resistance lines may be sloping rather than horizontal.
Take a look at this somewhat untidy example from the EUR/AUD daily chart, when the entry on break would have given us a several-day bull run.
What matters is that we are able to identify clear swing highs and lows, and to plot our entries on subsequent breaks of support and resistance.
For a double top, the central low of the letter M will be the support level for double bottoms the central peak of the W will be resistance.
Again, a conservative stop will be at 100% ATR below the new upward trendline at the point of entry.