5 Swing Trading Strategies that Work

@Colibritrader

Swing trading strategies (i.e., medium-term trading) have long been fascinated traders.

Swing trading strategies, therefore, start from the hourly chart and above and mostly follow the trend.

However, some other swing trading strategies exist that make the most of a market reversal.

Let’s have a deeper look now…

Swing Trading Strategies Introduction

Before proceeding, you can watch the video on swing trading strategies and specifically one of them:

Different trading styles exist, depending on a trade’s time horizon or timeframe used.

A broad classification of trading styles would be:

• Scalping
• Swing trading
• Investing

Scalping refers to short-term trading.

In some cases, the short-term notion is reduced to milliseconds per one single trade (in the case of quant or algorithmic trading).

Scalpers look for as little or less than one pip in profit and rarely stay for a few tens of pips.

Naturally, the following are more likely to be scalpers:

• Retail traders
• Algorithmic traders
• Quant traders

Algo traders, quants and retail traders

The difference between algorithmic traders and quant traders relates more to the available resources than anything else.

Quant companies employ mathematicians, pay for the best IT infrastructure, and aim for the 8^th of 9^th digit in an exchange rate quote.

In contrast, algorithmic traders still aim for the same digit (i.e., the 5^th) in a quotation.

Investors mostly look at the fundamental analysis, trying to arbitrage differences between various economies.

Depending on where they are on the business cycle, investors allocate their capital according to their bullish or bearish views.

Swing traders, the subject of our article, mix the two approaches.

Remember: There is a thin line between scalping and swing trading.

This line is as thin as the one between scalping and investing.

If you wish, swing trading sits between the two extremes, complementing each one of them.

Scalpers who are breaking their rules and keeping a trade open for more than a day suddenly become swing traders.

Alternatively, investors closing their positions in a day or two are also swing traders.

Swing Trading Strategies To Consider When Trading Financial Markets

Swing trading strategies have a difficult time to define time horizon.

For some investors, swing trading means keeping a position open for one week.

For others this period is one year.

It really depends on everyone’s expectations.

What matters most is the independence given by swing trading.

Using swing trading strategies gives a trader:

• Peace of mind – you do not need to constantly watch the market
• Free time – once the setup in place, simply monitor the trade from time to time, making sure money management rules are in place.
• Better risk-reward ratios than swing trading or even investing

Before anything, money management is key.

Swing Trading and Money Management

Swing trading strategies that do not follow a money management plan fail in the end.

The swing trading strategies presented in the following sections are based on:

1. Trend following
2. Channeling
3. Moving averages
4. Japanese candlesticks reversal patterns
5. Divergences

Higher Highs/Higher Lows – Lower Lows/Lower Highs After a Breakout

One of the most powerful swing trading strategies of them all uses the series seen in rising and falling markets.

More precisely:

• In a bullish trend
  • Higher highs and higher lows
• In a bearish trend
  • Lower lows and lower highs

The two series have tremendous power when they follow a breakout.

But how does one define a breakout?

A breakout is a price “escape” from congestion.

Sometimes, the congestion, or consolidation, takes many years – the more, the better.

At other times, it takes little time, but the price action builds energy for an even stronger break (e.g., pennants).

Gold’s Breakout Used as Swing Trading Strategy

The price of gold is recently on everyone’s lips.

Following the start of the coronavirus pandemic, investors rushed into buying gold.

Because central banks and governments expanded the monetary and fiscal policies, investors expect higher inflation.

Or, gold is viewed exactly to protect investors from inflation.

At the time of writing this article, gold trades well above $1800.

Everyone wants onboard, but is it too late?

Or maybe it is not?

What became obvious during the pandemic (i.e., fear of inflation) was not so clear before that.

Why is it important?

Because gold broke higher about nine months before the coronavirus outbreak in March 2020.

More precisely, gold’s breakout and the subsequent swing trading strategy that followed began in June 2019.

The 6 Year Gold Consolidation Stage

Six years it took gold to consolidate before breaking higher.

How to use that breakout as a swing trading strategy?

Here is a guide:

• Look for a consolidation
• Define the level where the price validates the breakout
• Make sure to look for the presence of
  • Higher lows in the case of a bullish breakout
  • Lower highs in the case of a bearish breakout
• Wait for the breakout
  • Tip – ideally wait for the market to make a new
    • Higher high in bullish breakouts
    • Lower lows in bullish breakouts
• Trade the breakout
  • Go long with a stop-loss on the previous higher low
  • Go short with a stop-loss at the previous lower high
• Target minimum 1:2, ideally 1:3 risk-reward ratio or higher

Some traders decide to book half profits by the time the price reaches 1:1 or 1:2.

Next, they raise the stop-loss to break-even, reducing exposure.

Finally, traders wait for the last target – or even more, as this is not a risk-free trade.

The chart below reflects why this is one of the most powerful swing trading strategies.

The price of gold, while breaking out a year ago, keeps on forming higher highs and higher lows.

Making the Most of Channeling Markets

Channels are great swing trading tools.

It should come as no surprise that multiple swing trading opportunities derive from a single channeling opportunity.

Because swing traders use bigger timeframes, the real possibility exists that various trades result from a single setup.

However, the key to using such swing trading strategies is to be able to build the proper setup.

A trader should master:

1. The rules for building a channel
   1. Connecting consecutive higher highs and consecutive higher lows
   1. Connecting consecutive lower lows and consecutive lower highs
2. What invalidates a channel
   1. The 25% rule
3. How to trail a dynamic stop-loss order

For a full understanding of this swing trading strategy, let us cover all three points.

To exemplify, we will use the recent AUDUSD daily chart.

More precisely, the focus sits with the price action since the coronavirus outbreak in March 2020.

The Rules of Building a Channel

A channeling market is one that keeps rising or falling while respecting a channel’s lines.

Just like with trendlines, the break of a channel does not invalidate the rising or falling market.

Trading Tip: The secret for building a channel is to connect (in a rising market) two higher lows.

And, in a falling market, two lower highs.

Simply follow the steps below to build a rising channel:

• Use a trendline to connect two consecutive higher lows
• Copy the trendline and past it on the first higher high
• Split the channel into two equal parts

The AUDUSD recent price action evolved in a perfectly defined channel.

Since the March 2020 dip triggered by the lack of USD liquidity, the pair bounced together with US equities.

Before moving forward, think of the fact that we can use swing trading strategies on such a channel only after conditions exist to build it.

In this case, the earliest to connect two higher lows was May 2020.

What Invalidates a Channel

The next step in the process refers to the channel’s invalidation.

More precisely:

• What represents a valid channel break
• When consider the bullish channel invalidated

The answer to the two points indicates if we should keep using channel swing trading strategies or stop altogether.

To answer the question, follow the two steps below:

• Measure the distance between the edges of the channel and its middle line
• Project it above and below the channel’s edges

Next, use parallel lines to expand the channel.

Finally, split all the rising channels into equally small channels (the red lines in the chart below).

And equivalent setup can be obtained in a bearish market.

How to Trail a Dynamic Stop-Loss Order

The most difficult thing to follow in such swing trading strategies is to adjust the stop-loss using a dynamic approach.

For a proper understanding, consider the three examples in the chart below, marked with numbers, and the explanation below:

• When the price falls into the lower quarter of the rising channel, go long
• Place a stop loss to 50% of the projected line below the main channel (lowest red line). Keep in mind that this stop loss adjusts with the price – it rises on the red line with every candlestick the market completes
• Target a move into the upper quarter of the rising channel
• Sell the upper quarter
• Place the stop loss order using a similar approach
• Target the lower quarter of the channel
• Rinse and repeat

The channel’s invalidation comes at the moment the price move beyond the projected extremes.

If the price keeps coming back inside the rising trendlines, the setup remains valid.

Moving Averages in Swing Trading

A simpler method to swing trade is to use moving averages.

Moving averages swing trading strategies have the advantage of being easy to set up and follow.

For the setup, use:

• Two fast SMA’s
  • SMA(20)
  • SMA(10)
• The moment the faster SMA crosses above or below the slower one

The idea is to catch swing trades on bigger timeframes while using fast-moving SMA’s.

In a way, the strategy resembles the golden and death crosses setups.

However, the big difference is that the moving averages used there lag the price action so that the trader cannot react quickly enough.

Daily Silver Example

To illustrate the moving average swing trading strategy, we use the silver daily chart.

The red and blue lines represent the SMA(10), respectively SMA(20).

Four situations appear on this chart:

1. The first time when we mark the cross between the two SMA’s
   1. Bearish cross
   1. Go short with a stop-loss at the previous lower high
   1. Measure the distance between the entry and the stop
   1. Find out the target by using a 1:2 or 1:3 risk-reward ratio
2. Do nothing
   1. Wait to see if the trend changes
      1. Wait for the next cross and check if the price reaches the previous cross’s level (horizontal line)
         1. if yes, the bearish trend continues
         1. if no, a new trend started
3. Go long with a stop loss at the previous higher low
   1. Measure the distance between the entry and the stop
   1. Find out the target by using a 1:2 or 1:3 risk-reward ratio
4. Same as the previous example

To sum up:

• Mark the crosses with a horizontal line
• If the price does not retrace to reach the line, go long or short on the next cross
• Use appropriate rr ratios

Japanese Candlesticks Patterns in Swing Trading

Japanese candlesticks patterns show mostly reversal conditions.

When used on bigger timeframes, they are the source of valuable swing trading strategies.

All the classic patterns work:

• Morning and evening stars
• Bullish and bearish engulfing
• Doji’s
• Dark-cloud cover and piercing
• Hammer and shooting start

The EURGBP daily chart below shows a bullish engulfing. In such a pattern:

• The second candlestick’s real body fully engulfs the first candlestick’s real body
• The second candlestick’s real body should not engulf the first candlestick’s upper shadow

The EURGBP Example

The setup below respects both conditions.

But the Japanese candlestick patterns represent a battle between buyers and sellers at tops and bottoms.

It means that a good setup needs a retracement before going long or short.

Sure, the risk to be stopped increases, but the retracement is mandatory for the setup to work.

Plus, it offers a better entry and a much higher risk-reward ratio.

Based on the chart below, consider the following steps:

1. Measure the highest and lowest points in the pattern
2. Use horizontal lines to define the area
3. Find out the 50% retracement level – that is the entry
4. Place a stop loss and the lowest point in the pattern
5. Use a trendline to measure it
6. Project the measured move three times from the entry point – that is the take profit

The six steps presented above form the setup for all swing trading strategies that may result from using Japanese reversal patterns.

Using Divergences in Swing Trading

The following swing trading strategy differs from what you may think when reading the title of this paragraph.

While it does involve an oscillator, the strategy does not use the classic divergence everyone knows.

Instead, it focuses on the divergent behavior between the market and an oscillator.

EURUSD Daily Example

In this case, the EURUSD is the market, and the CCI (Commodity Channel Index) is the oscillator.

The EURUSD daily chart shows a rising channel, albeit a slow rising one.

While the price reached only half of the channel’s distance, the oscillator already reached oversold territory.

This way, the market and the oscillator diverged in their message, leaving a trading setup worth following.

The rules of building a channel explained earlier in the article remain valid.

After building it, look for similar divergences like the one shown below.

For instance, using the same logic, the current price action does not guarantee a short trade.

To validate a trade follow these steps:

• Wait for the price to retrace half of the channel and stall there
• Check the oscillator to see if it is in overbought or oversold areas
• Go long or short, depending on the signal, targeting the corresponding channel’s edge
• Use the lowest or highest oscillator swing as the invalidation level

Any oscillator works with this swing trading strategy.

However, its major drawdown is that the invalidation level is not good enough to build suitable risk-reward ratios.

Conclusion

The most relevant thing to keep in mind after reading this article refers to the timeframes used.

Swing trading strategies require a trading setup applied to bigger timeframes.

As such, the timing of a trade, as well as the patience to wait for the reward or target, are equally important.

After all, this is what swing trading refers to – the ability to wait for a trade setup and its target.

The beauty of using swing trading strategies is that the trader has plenty of time to react.

Last Words on Money Management

Moreover, the remaining time is used to adjust the money management.

For example, refer to the moving averages swing trading strategy presented in this article.

If applied on various currency pairs and other markets on the daily chart, there is always a trade to take.

By the time that a trade goes in profit, the trader’s job is to think of the opportunity cost of closing the trade too early or leaving it open to reach the target.

If there is no other tempting setup, the wisest thing to do is to let the trade go.

However, sometimes a bigger risk-reward ratio in other trades may prompt the trader to close the trade earlier.

In the end, it depends on how aggressive the money management rules are.

All in all, traders need the patience to benefit the most of swing trading strategies.

Coupled with discipline, they are the key to successful trading.

Also, there is no such thing as the perfect swing trading strategy.

Instead, perfect execution is responsible for growing the trading account.

P.S.

If you still haven’t gotten the Free Swing Trading guide, please do that from the link below:

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