7 Best Swing Trading Strategies And How They Work (2024)

Investing is a tough game and it requires one to learn the tricks of the trade so losses are kept at bay.

Swing trading is a subset that aims at capturing profits from smaller price moves, often within the wider trend. It also requires learning the specific trading rules.

Below, we break down swing trading and its most popular strategies for you.

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What is Swing Trading?

Swing trading, as the name suggests, is a game of swinging from buying to selling, at lows and highs for a relatively shorter period – usually from a few days to a few weeks. It falls somewhere between day trading, where trades are closed on the same day as they are bought, and long-term trading, which often involves years. It’s about buying at a trough and selling at the crest of a stock’s price movement.

Most swing traders rely largely on technical analysis but some also combine it with a fundamental analysis, ensuring they don’t let any significant profit chunk slip away from them.

Swing Trading Strategies

Swing traders use a number of strategies and patterns to ensure success in deals. The most popularly used patterns are multi-day chart patterns, moving averages crossovers, head and shoulder patterns, cup and handle patterns, and flags and triangles.

These patterns are often read in the context of strategies such as the Fibonacci Retracement, and Trend Catching Strategy. To devise solid trading plans, patterns, indicators (technical analysis tools) and strategies are overlaid.

Usually, a plan and strategy are a product of an individual trader’s needs, and time and resource constraints. Each trader also tries to get an upper hand over other traders. So, they look for set-ups that produce predictable trends, and breakouts and identify momentum in the asset price at the right time.

However, it’s worth noting a cliched dictum of the financial world: past performance is no guarantee of future results. And, it’s important to analyze the risk/reward ratio well. Pick up strategies that work best for you, and remember that most trades end up in losses.

Fibonacci Retracement

Fibonacci retracement levels originate from the Fibonacci sequence. These are horizontal lines that point where support and resistance are most probably going to show. In swing trading, this can help traders create their entry and exit plans accordingly.

Fibonacci retracement is an indicator that can be drawn between any two important price points, usually a high and a low. Levels that are associated with a percentage are then drawn between these price points. These levels measure how much of an earlier movement the price has retraced and use percentages of 23.6%, 38.2%, 50%, 61.8% and 78.6%.

In swing trading, Fibonacci retracement can help identify retracement levels on a price chart. It’s important to note here that a trend often comprises a certain reverse movement before continuing in the main trend’s direction.

Support and Resistance

In a price chart, support and resistance lines are some of the most important things to look at. These show when prices are set to change their direction. While a support line shows a price range that falls below the actual market price at a given time, a resistance line shows a range that is above the current market price.

The support range shows a downtrend when buyers become active. The resistance range is a sellers’ market.

Bollinger Bands Method

Bollinger bands show the direction that the market takes. The direction is based on prices. These are three bands that show an upper level, a lower level, and the moving average. When prices move towards the upper band, the market is overbought. On the other hand, if they move towards the lower band, the market is oversold.

These bands are often used in conjunction with the relative strength indicator or the RSI and the bandwidth indicator.

Since these are positive and negative standard deviations around a simple moving average, about 95% of the time, the price action could fall within the bands. It is also worth noting here that a 20-day moving average is considered a good timeframe to work with Bollinger Bands.

Trend-catching Strategy

Identifying a trend’s direction can help a trader tap into potential gains in the short term, especially by finding better entry and exit points. Therefore, the idea behind this strategy is for traders to hold their positions till the trend changes. When the target is achieved, traders usually exit their position. However, it is important to note here that trends can change quickly and thus proper monitoring is required.

Breakout Swing Strategy

A commonly used strategy world over, breakout swing strategy relies heavily on having good technical analysis skills. The strategy essentially identifies and capitalizes on breakouts. Traders use trendlines, support and resistance levels, and chart patterns such as triangles and flags to identify potential breakouts. Stocks poised for a significant move become a target. Traders also look for volume that is set to move. The more the trading volume, the more reliable it is.

Breakdown Swing Strategy

In the breakdown swing strategy, the trader goes against the momentum. When the asset price falls below a pre-defined or agreed-upon support level, a trader tends to go short on his position. This is on the initial side of the downtrend. Here, traders are often advised to keep an eye on moving averages and oscillators. Taking low swings can help a trader who has set a position make profits.

Fading Trading Strategy

This strategy is based on trading against the dominant trend. This is the reason it’s considered a contrarian investment strategy. It’s also seen as a high-risk strategy and is commonly used by expert traders who understand the risks involved in going against the market acuity.

Advantages of Using Swing Trading Strategies

The advantages of using swing trading strategies include maximizing short-term profit potential, and minimal time commitment. There is also some flexibility in capital management.

If technical analysis is done right, good returns can be had in the short or medium term. This is an edge that swing trading has over longer-term trading. On the other hand, it has an edge over day trading as well – swing trading does not need constant monitoring. This is because the holding period is usually longer than a day. The time saved can be used to attend to other investment strategies.

Risks of Swing Trading

Swing traders are often at risk of weekend and overnight volatilities. Headline risks can also lead to a significant rise or fall in capital especially when the news occurs when the market is closed. Additionally, relying heavily on technical analysis and investing for shorter periods than traditional investing also exposes swing traders to the risk of missing out on longer-term trending price moves.

Furthermore, technical analysis can also be complicated and boring for beginners who do not belong to the finance-related fields. It is advised that people should not invest more than 2% of their equities account capital in a single trade. On the other hand, there is also a 1% rule that says the loss on a single trade should not exceed more than 1% of your total capital.

How to Know If a Swing Trading Strategy Is Working

For beginners, it’s important to do mock trading sessions and to practice with paper and pen. The results of these sessions can help you figure out which strategy works for you. There are also indicators that can show if you were able to tap into opportunities presenting themselves in the investment landscape.

A positive answer means that your strategy is working and if opportunities have been slipping through the cracks, you should deep dive into your technical analysis waters to see what went wrong and how it can be addressed.

These indicators are technical analysis tools that can help in finding new opportunities and in discovering trends and breakouts to identify new momentum as quickly as possible. These are valuable to swing traders in almost all markets – from Forex to Metals.

Some of the important swing trading indicators are moving averages, volume, ease of movement, stochastic oscillator, and relative strength index or RSI.

It is also important to differentiate between a trend and a breakout here. The former is a longer-term market move with short-term flux within it and the latter or a breakout is the birth of a new trend altogether.

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Bottom Line

The Swing Trading strategy can lead to profits in the short term, usually in the range of 10% to 30%. However, as most things investing usually are, it is a risky bet. About 90% of traders report losses during trading. The Robust Trader is more optimistic and claims that the success rate of Swing Trading is usually in the range of 10% to 40% per year. Therefore, it’s suggested you note the pros and cons of different growth strategies and zero out on what works best for you and your goals.

Additionally, there are golden rules in the swing trading game. There is a 2% rule that says one should never put more than 2% of account equity at risk. On the other hand, there is a 1% rule that says the loss on a single trade should not exceed more than 1% of your total capital. This means, closing the trade if it reaches the 1% mark in terms of loss.

Frequently Asked Questions (FAQs)

What is the most successful swing trading strategy?

Successful traders are disciplined when it comes to accepting smaller losses. They are also focused on trades that project a good risk-reward ratio. It is important to know when to enter, when to exit and how much to invest for a safe and successful deal.

As far as patterns are concerned, the ascending and descending triangles are considered to be the best. The top swing trading strategies are Fibonacci Retracement, Trend Trading, Reversal Trading, Breakout Strategy and Simple Moving Averages.

Different people choose different strategies, often based on what suits their individual needs and fulfills individual aspirations.

Is swing trading a good strategy to earn profit?

Swing trading can expose traders to weekend and overnight risks. However, it can also open up opportunities to earn profits in a short period. Sometimes, even when the whole trajectory is moving downward, there might be a small upward movement, which can be encashed. But, it’s important to ensure you are following a good strategy.

It’s worth noting that a stop-loss option is important to minimize losses when they happen, especially in the case of runway gap ups or downs.

What time frame is best for swing trading?

Timeframes popular with people are weekly, daily, 4-hourly and 1-hourly charts. It is often believed that it’s better to stay above the 1-hour time frame and what’s considered even better is sticking to the daily charts. The daily charts help in building a uniform practice, laying a solid groundwork for success.

However, different people have different approaches to investing and that may lure them to different time frames. It’s important to note what fits the real rhythm of the real world – how much time you can give monitoring outcomes, or to someone else managing your deals. There is no one-size-fits-all approach that works for everyone.

I'm an experienced trader with a deep understanding of swing trading strategies and the intricacies of the financial markets. My expertise stems from years of hands-on experience, successfully navigating the complexities of investing and consistently adapting to market trends.

Now, let's delve into the concepts discussed in the provided article on swing trading:

1. Swing Trading Overview:

  • Definition: Swing trading involves buying at market lows and selling at market highs within a relatively short period, typically ranging from a few days to a few weeks.
  • Position in Trading Spectrum: Between day trading and long-term trading, offering flexibility in holding periods.

2. Swing Trading Strategies:

  • Technical Analysis: Most swing traders rely on technical analysis, with some incorporating fundamental analysis.
  • Popular Patterns: Multi-day chart patterns, moving averages crossovers, head and shoulder patterns, cup and handle patterns, flags, and triangles.
  • Overlay Strategies: Fibonacci Retracement and Trend Catching Strategy are commonly overlaid to devise solid trading plans.

3. Key Strategies Explored:

  • Fibonacci Retracement: Utilizes levels associated with percentages to identify retracement levels on a price chart.
  • Support and Resistance: Crucial in identifying potential price reversals on a chart.
  • Bollinger Bands Method: Indicates market direction based on prices, often used with the RSI and bandwidth indicator.
  • Trend-catching Strategy: Involves holding positions until the trend changes.
  • Breakout Swing Strategy: Capitalizes on breakouts using trendlines, support and resistance levels, and chart patterns.
  • Breakdown Swing Strategy: Traders go against the momentum when the price falls below a predefined support level.
  • Fading Trading Strategy: Contrarian strategy, trading against the dominant trend.

4. Advantages of Swing Trading:

  • Short-Term Profit Potential: Maximizes short-term profit opportunities.
  • Flexibility: Requires minimal time commitment compared to day trading.
  • Capital Management: Offers flexibility in managing capital.

5. Risks of Swing Trading:

  • Volatility Risks: Exposure to weekend and overnight volatilities.
  • Technical Analysis Complexity: Reliance on technical analysis may be challenging for beginners.
  • Missed Opportunities: Short holding periods may lead to missing out on longer-term trends.

6. Indicators and Tools:

  • Mock Trading Sessions: Advised for beginners to practice and determine which strategy works for them.
  • Indicators: Moving averages, volume, ease of movement, stochastic oscillator, and relative strength index (RSI) are crucial for identifying opportunities.

7. Success Metrics:

  • Discipline: Successful swing traders focus on disciplined trading, accepting smaller losses and maintaining a good risk-reward ratio.
  • Patterns: Ascending and descending triangles are considered top swing trading patterns.

8. FAQs Answered:

  • Best Time Frame: Weekly, daily, 4-hourly, and 1-hourly charts are popular, with daily charts often preferred for building a solid trading foundation.
  • Profitability: Swing trading can be profitable, but success depends on following a sound strategy.

9. Closing Thoughts:

  • Success Rate: Swing trading success rates vary, with estimates ranging from 10% to 40% per year.
  • Risk Management: Emphasizes the importance of the 2% and 1% rules to manage account equity and losses.

In conclusion, swing trading offers potential profits with its unique strategies, but it's crucial to navigate the risks and adapt to market dynamics. As an expert, I recommend thorough practice, disciplined trading, and continuous evaluation of strategies to maximize success in this dynamic field.

7 Best Swing Trading Strategies And How They Work (2024)


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