Considering the thousands of trading strategies in the world, the answers to these questions are difficult to pin down. Compared to the seemingly endless numbers of strategies, there are far fewer trading styles. While the exact figure is debatable, I would argue that there are less than ten popular styles in existence.
If you have identified swing trading as a candidate—or just want to know more about it—then this post is for you. I will also share a simple 6-step process that will have you profiting from market swings in no time.
As I mentioned above, there are far fewer trading styles than there are strategies. Within each of these, there are hundreds if not thousands of strategies.
In other words, there are many different ways to day trade just as there are many ways to swing trade. For instance, one day trader may use the 3 and 8 exponential moving averages combined with slow stochastics. Another trader of the same style may use a 5 and 10 simple moving average with a relative strength index. The same goes for swing trading. The endless number of indicators and methods means that no two traders are exactly alike. In summary, trading styles define broad groups of market participants, while strategies are specific to each trader.
In fact, attempting to catch the extreme tops and bottoms of swings can lead to an increase in losses. The best way to approach these trades is to stay patient and wait for a price action buy or sell signal. For now, just know that the swing body is the most lucrative part of any market move. On the opposite end of the spectrum from swing trading we have day trading.
As you now know, the goal with swing trading is to catch the larger swings in the market. Naturally, this requires a holding period that spans a few days to a few weeks. I spend most of my time on the daily charts. I use a specific type of chart that uses a New York close. My suggestion is to start with the daily time frame. Once you become profitable at swing trading with the daily, feel free to move to the 4-hour time frame.
As a general rule, price action signals become more reliable as you move from the lower time frames to higher ones. Think of drawing key support and resistance levels as building the foundation for your house. These are the most basic levels you want on your charts. They provide a great foundation for trading swings in the market and offer some of the best target areas.
If you want to know how to draw support and resistance levels, see this post. Not all technical traders use trend lines. They not only offer you a way to identify entries with the trend , but they can also be used to spot reversals before they happen. Be sure to review the lesson I wrote on trend strength see link above. It will explain everything you need to know to use trend lines in this manner.
At this point, you should be on the daily time frame and have all relevant support and resistance areas marked. Notice how each swing point is higher than the last. You want to be a buyer during bullish momentum such as this. On the opposite end of the spectrum we have a downtrend. In this case, the market is carving lower highs and lower lows. Last but not least is a ranging market.
As the name implies, this occurs when a market moves sideways within a range. Although the chart above has no bullish or bearish momentum, it can still generate lucrative swing trades. In fact, ranges such as the one above can often produce some of the best trades. This is mostly due to the way that support and resistance levels stand out from the surrounding price action.
Steps 1 and 2 showed you how to identify key support and resistance levels using the daily time frame. This tells you whether the market is in an uptrend, a downtrend or range-bound. My two favorite candlestick patterns are the pin bar and engulfing bar.
You can learn more about both of these signals in this post. The goal is to use this pin bar signal to buy the market. By doing this, we can profit as the market swings upward and continues the current rally.
On the flip side, if the market is in a downtrend, you want to watch for sell signals from resistance. The idea is to catch as much of it as possible, but waiting for confirming price action is crucial. When looking for setups, be sure to scan your charts.
Scanning for setups is more of a qualitative process. Most traders feel like they need to find a setup each time they sit down in front of their computer. This is called searching for setups. The first rule is to define a profit target and a stop loss level. Many traders make the mistake of only identifying a target and forget about their stop loss. In order to calculate your risk as explained in the next step, you must have a stop loss level defined.
The second rule is to identify both of these levels before risking capital. This is the only time you have a completely neutral bias. As soon as you have money at risk, that neutral stance goes out the window. It then becomes far too easy to place your exit points at levels that benefit your trade, rather than basing them on what the market is telling you.
Remember that the goal is to catch the majority of the swing. Once they are on your chart, use them to your advantage. That involves watching for entries as well as determining exit points. See this lesson to find out how I set and manage stop loss orders.
Before I discuss how to identify stop loss levels and profit targets, I want to share two important concepts. The first is R-multiples. This is a way to calculate your risk using a single number. A favorable risk to reward ratio is one where the payoff is at least twice the potential loss.
Written as an R-multiple, that would be 2R or greater. You can learn about both of these concepts in greater detail in this post. When calculating the risk of any trade, the first thing you want to do is determine where you should place the stop loss. For a pin bar, the best location is above or below the tail. The same goes for a bullish or bearish engulfing pattern. This is where those key levels come into play once more. Remember that when swing trading the goal is to catch the swings that occur between support and resistance levels.
So if the market is trending higher and a bullish pin bar forms at support, ask yourself the following question. The answer will not only tell you where to place your target, but will also determine whether a favorable risk to reward ratio is possible. There is no right or wrong answer here.
After more than a decade of trading, I found swing trades to be the most profitable. Before I experimented with everything from one-minute scalping strategies to trading Monday gaps.
Finding a profitable style has more to do with your personality and preferences than you may know. Most Forex swing trades last anywhere from a few days to a few weeks. This means holding positions overnight and sometimes over the weekend.
There are, of course, a few ways to manage the risks that accompany a longer holding period. One way is to simply close your position before the weekend if you know there is a chance for volatility such as a government election. Swing trading Forex is what allowed me to start Daily Price Action in On average, I spend no more than 30 or 40 minutes reviewing my charts each day.
Spending more time than this is unnecessary and would expose me to the risk of overtrading. Because swing trading Forex works best on the higher time frames , opportunities are limited. You may only get five to ten setups each month. For instance, my minimum risk to reward ratio is 3R. In fact, a slower paced style like swing trading gives you more time to make decisions which leads to less stress and anxiety. Having the ability to trade Forex around my work schedule was a huge advantage.
This is the kind of freedom swing trading can offer. There is nothing fast or action-packed about swing trading. Most day traders, on the other hand, make a much smaller amount per profitable trade. They make up for it in volume, but the return per execution is relatively small.
Most swings last anywhere from a few days to a few weeks.More...