The swing trade is a strategy that can be implemented on any financial asset that can be bought and sold and analyzed on a chart. Coming in somewhere in the middle ground between buy-and-hold investors and day-traders, a typical swing trader holds a position for more than a day but rarely longer than two or three weeks. Online trading platforms have made it easier for individual traders to adopt this strategy from the comfort of their own laptop, kicked back on the living room couch. The question becomes what is a swing trade and exactly how does one go about executing one?
Swing Trading 101
The thought process behind taking a swing trade is not complex. Your first goal is to identify the overall trend, which is fairly easy to do by pulling up your charts and examining price action from a high-level perspective. For this, forget the short time span charts. Look at four-hour, dailies, and maybe even weeklies. This should give you a solid feel for the overall trend of the market. Is it bullish or bearish?
Armed with this information, it’s time to delve into shorter term charts, probably the hourly or even 15 minute should do fine. What you’re trying to do at this stage is identify where the market pulls back from the overall trend, offering you a safe entry point to take a position and profit when the market trend resumes. Does the trend have to resume? Obviously not. A trend can end at any time, leaving you in a negative position. That’s why you should always trade with a stop loss whether using a swing trade strategy or any other.
Those who have watched a particular financial market for any length of time know that price often seems to have no clear direction. The good news is that, even under these kind of conditions, a good swing trader can still identify points of support and resistance between which price ranges and take positions accordingly.
Buying the Pullback
Professional traders know that buying into a sharply rising market (or selling into a sharply declining one) is not a good practice. Rarely do prices continue to shoot straight up or down for a length of time. A sharp rise is almost always followed by a retreat which allows the market to catch its breath before moving upwards again. This is called a pullback. It’s almost like a rubber band is attached to price and only lets it stretch so far before pulling it back for a bit.
A successful swing trader learns to spot these pullbacks and prepares to enter into trades as soon as he or she sees that price action is returning to the overall trend. For these examples we’re discussing an upward trend. The same principles apply to a downtrend. Once again, there’s no guarantee a trend will resume after a pullback. A certain percentage of the time the pullback fails to rebound and a trend establishes in the opposite direction. Smart traders know this and have a stop loss in place that kicks them out of the trade in the event a pullback fails and lines of support are broken to the downside. Your stop loss should be set just below the lowest point in the pullback.
How do you know when to exit a swing trade? It would be great if we could just let it go until we owned all the money in the world. That probably won’t happen. Successful traders have a system in place that tells them when to remove profits by closing a swing trade. In general, it makes sense to target the most recent high of the uptrend. Some traders get out completely at that point, assuming another pullback is imminent. Others take a portion in profit and move their stop loss to breakeven, insuring that the overall trade will be profitable no matter what happens.
There you have it. Swing trading in a nutshell. Keep in mind there are different permutations of the swing trade strategy. Those who use this approach often make modifications over time that work better for their trading style or particular market they trade in. The bottom line is that swing trading has been around for a long time because, when combined with sound money management and trader discipline, it can create predictable profits.