Swing Trading Strategies - Learn How That Works

What is Swing Trading?


A Swing Trade is similar to buy-and-hold investment strategy (or sell-and-hold, depending on the trend’s direction). The difference mainly relates to the trading period as equity investors, for instance, develop their strategies for weeks and months, while Forex Swing Traders focus on several days, up to three weeks in some cases. The main idea is to analyse the market in terms of possible sharp price swings, which take place for quite a while. In most cases, such trends occur based on the fundamental influence such as expectations for an interest rate hike or cut by a central bank, forecasts about changes in macroeconomic data like GDP, employment or inflation, forcing monetary policymakers to change the rhetoric. When it comes to commodities, a sudden shift in supply/demand relation could drive the market to go up or down. Unexpected wars, including trade and currency wars, could also affect a strong trend in commodities. Stock indices are also vulnerable to a wide range of macroeconomic and geopolitical factors. Nevertheless, financial assets are mainly driven by fundamental factors, and a Swing Trader is keen on taking advantage of that.

What is the best timeframe for Swing Trading?


Swing Traders ignore short-term and intraday price changes. What they focus on is a significant change in market conditions, which could force traders to shift their market expectations and long-term positioning. Therefore, the best timeframe to analyse and trade on is the daily chart. However, weekly charts are also informative in terms of current trends’ direction. Understanding of the long-term tendency would give a swing trader a clear and obvious signal of whether is he going to position himself by or against the long-term trend. What’s more, weekly charts are full of additional market information, including possible targets for swing trading positions, and support/resistance levels where closer attention of a trader is required.

What are the fundamental events able to reverse long-term trends?


Global Central banks set the interest rate in every country. That rate has a direct influence on the cost of borrowed funds in that region, and it also influences the market-based yield of credits and loans given by commercial financial institutions. The yield affects expenditures of a corporate sector for long-term investment projects, thus, influences the overall corporate profit, quarterly and yearly earnings, dividends paid to shareholders and the cost of equities at the end of the day. At the same time, fixed-income investors might take advantage of interest rate differentials in different countries and regions. The carry trade flows drive the currency market. Therefore, any fundamental event, which might lead to a change in monetary policy, could affect the currency exchange rate, as well as shift the market’s sentiment, causing sharp price swings.

Here is the list of most important fundamental events for currencies and stock indices:

  • Gross Domestic Product - reflects the country's economic growth;
  • Inflation (Producer and Consumer Price Index) - is the main target to tackle by any central bank in the world;
  • Employment change - shows the health of the country’s economy;
  • Earnings, Consumer Spending and Retail Sales;
  • Manufacturing and Industrial Production;
  • Trade balance.

How to Swing Trade?


The main rule of a speculator says: buy cheap and sell expensive. For short positions, the aim could be reversed for 180 degrees. However, the most essential part of the equation remains the same. Every Swing Trade is keen on seeking a reversal - a point where one trend is getting exhausted and another trend is born. Sometimes it happens that trends reverse in the middle of the action without getting reached a certain top or bottom of the market. This example is related to the fundamental environment, which has to be monitored by every swing trading strategy as mentioned above. This part of the article is aimed to focus on technical analysis.

Technical indicators for swing trading


Trend indicators, even with a lagging nature, are the most suitable kinds of technical tools for swing trading forex. One of the main advantages of the trading strategy is that it can work well with different types of indicators. The most popular ones include Moving Average of Convergence and Divergence (MACD), Bollinger Bands (BB) and Ichimoku Cloud. All of the indicators are widely used and described in details, so every swing trader should have their preferences. In this case, the focus is on the Ichimoku Cloud trend indicator.

Ichimoku Cloud patterns


The indicator itself is quite a complicated and multi-level technical system. However, several patterns and chart setups make the usage of Ichimoku quite simple and easy to understand.

Here are several examples of what chart setups traders should watch closely when using swing trading stocks:

  • Price crosses Ichimoku Conversion and Base Lines support/resistance curves;
  • Leading Span performed a crossover;
  • The price gets out of the cloud after being in the uncertain territory;
  • The rate bounces off the upper or lower band of the cloud.

Trading Rules


As long as there are too many cases to describe, and approaches for swing trading might be different depending on the underlying asset and market conditions.

Several common rules are listed below:

  1. Never buy on top or sell on bottom of the market.
  2. Every position has to be in accordance with long-term trends.
  3. Always monitor the weekly chart before placing trades on the daily timeframe.
  4. Watch fundamental events, which could change the long-term positioning and direction.
  5. Always act with a thought in mind that the market could go against your position for some time. Be ready to add more volume in case if that happens.

Conclusions - Swing Trading Strategy


Swing trading is a popular trading method for long-term market players, especially if they don't have enough time to monitor the price action on a daily and hourly basis. Although swing trading is focused on strong trends, and the average holding time of a trading position is reaching 7-10 working days, some of the small rate fluctuations are ignored. The trading approach suggests a certain depth of the trading account as sometimes it’s needed to stand under the water for a while, or even add more volume for trading positions when the market is going against traders. At the same time, the trading system requires keeping the hand on the market’s pulse, and knowing all of the crucial fundamental events capable of shifting the market’s sentiment in the long run. Thus, the system has several limitations for a small account and inexperienced traders.
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29.08.2019
Investment strategies