You may have heard about it before without knowing what it means, or you’ve already adopted it as your preferred style of trading the forex market, but do you really know the simple strategies that work with swing trading ?
As a swing trader, you need to have a reliable means of spotting good opportunities in the market.
Of course, swing trading, in itself, is not a strategy per se. It’s just one of the various styles for trading the forex market — the others being scalping, day trading, and position or long-term trading.
In simple terms, swing trading is a type of trading where you hold your trades for more than one day, trying to capture a price swing.
In this post, we will show you some simple swing trading strategies that work, but before then, let’s find out what swing trading means and why you may consider adopting this trading style.
What swing trading means
Swing trading is a style of trading where trades are held from a few days to a couple of weeks.
With this style of trading, a trader is looking to take advantage of the individual price swings — the upswings and downswings — rather than following the long-term trend to its conclusion.
Most times, a price swing lasts a few days, but sometimes, it may last up to a few weeks.
Since a price swing on the larger timeframes appears as short-term trends on the lower timeframes, it’s safe to say that swing traders aim to capture the short-term trends.
Swing trading sits at the middle of the spectrum between day trading, which aims to benefit from the best price move of any given day, and position trading, which tries to ride the long-term trend to its conclusion.
To further understand how swing traders play their game, we need to take a look at the chart timeframes used by different types of traders.
Scalpers use the lowest timeframes, such as the one-minute and, maybe, five-minute timeframes; day traders mostly use from five-minute to one-hour timeframes; and position traders use weekly may use the daily timeframes for trade entry.
However, swing traders focus mostly on the daily (D1) and four-hourly (H4) timeframes. They use the daily timeframe to get a broad view of the market and identify the possible swing points to trade.
When a potential trade level is identified, a swing trader may step down to the H4 timeframe to look for a better entry point.
Just like any other style of trading, a swing trader can employ either a technical analysis method or a fundamental analysis method or a combination of the two to identify tradable moments in the market.
Even those that rely solely on technical analysis still enjoy the greater volatility provided by economic data reports.
The more volatile the market is, the bigger the price swings and the larger the potential profits.
Unlike position traders, who always manage their trades with a trailing stop loss and may not put a profit target, swing traders almost always place a profit target to any of their trades.
Their profit targets are often placed at the next potential swing points where they expect the price to reverse.
And, the reason is simply — swing traders only intend to profit from the current price swing and never hang on to wait out a pullback.
They aim to either get out before a pullback starts or even switch over and trade the opposite swing.
When it comes to placing a profit target, the least a typical swing trader can do is to take partial profits at multiple levels.
Some may decide to trail the last portion of their trades until the trade gets stopped out.
Before discussing the simple swing trading strategies you can use, let’s take a look at the pros and cons of using this style of trading in the forex market.
The pros and cons of swing trading strategies
Swing trading has many pros and cons, just like any other trading style available. Here are the benefits of swing trading:
Swing trading takes less time: Trading on the lower timeframes, as scalpers and day traders do, means constantly monitoring the chart, since price data are printed more frequently than on the higher timeframes.
With each new data, the trader is analyzing the chart either to find new trading opportunities or decide whether to exit an already placed trade.
Swing trading, on the other hand, doesn’t take as much time because the trader is on a higher timeframe.
A D1 candlestick is printed by the end of the day, so a swing trader may decide to be checking the chart once a day.
It is more cost-efficient: Every trade entry and exit costs the spread — the difference between ask and bid price —and in some cases, an extra commission.
Swing traders don’t trade as frequently as day traders and scalpers do, so they spend less on spreads and commissions.
Trades are easier to manage: As we said before, a swing trader doesn’t need to be checking his chart that often to adjust or manage his trades, unlike what day traders do — frequently adjusting their positions throughout the trading day.
Easier to take advantage of the long-term trend: With swing trading, it’s easier to stay only in the direction of the trend and trade only the impulse price swings, unlike day traders and scalpers that may not be able to differentiate between short-term and long-term price directions and won’t know when they are going against the trend. On this aspect, swing trading may seem less risky than scalping and day trading.
Trades are closed before a pullback: Unlike trend followers that frequently watch their gained profits eroded by a pullback, swing traders usually exit their trades before the opposite swing starts — they don’t get caught up with pullbacks.
As with any style of trading, swing trading also carries a few risks, such as these:
Overnight price gaps: Swing traders leave their trades for several days. As a result, their trades are exposed to overnight price gaps — price opening with a gap above or below the previous closing price — which can happen over the weekends.
This can render a stop loss useless, leading to unintended huge losses.
Slow reaction time: Unlike scalpers and day traders, swing traders don’t monitor their trades all through the day, so they don’t react fast to sudden changes in the market.
It is not uncommon for a trade that’s 10% away from the profit target to reverse and become a losing trade.
To minimize this, experienced swing traders lock their profits with trailing stop orders and also take partial profits at multiple levels.
The simple swing trading strategies that work
There are many strategies swing traders use to play the market. In fact, if you search online, you will be seeing something like “10 swing trading strategies” or “12 basic swing trading methods.” But do they really work? They can’t make you a penny in the market.
To succeed in your trading journey — that’s right, trading is a journey and not a quick fix to your money issues — you will need to have a good strategy with positive expectancy.
In other words, a strategy that makes more profits than losses. Only such a strategy can offer you an edge in the market.
Here, we will show you some simple swing trading strategies that work, but they don’t work in all market conditions.
Some work best in a trending market, others work better in a ranging market, while a few can work in any market condition.
Catching the impulse wave
The price moves in swings (waves), and in a trending market, the price waves are grouped into impulse waves and corrective (pullback) waves.
Impulse waves move in the direction of the trend, while the pullback waves move against the trend direction.
Thus, with this strategy, you are trading with the trend but only trying to catch individual impulse waves.
This strategy is also known as the pullback reversal strategy. In an uptrend where impulse waves move upwards and pullback waves move downward, it is known as buying the dip, while in a downtrend, where impulse waves move downward and pullbacks move upward, it's called selling the rally.
And you know why? The whole point about the strategy is to anticipate the end of a pullback and place a trade when a new impulse wave is about to begin.
Swing traders, who use this strategy, must have a means of estimating when a pullback is likely to reverse so that they can trade the next impulse wave.
They do this by identifying important market levels where a price wave may end and using indicators or price action setups to gauge when a pullback is losing momentum.
There are tools swing traders use to identify price potential reversal levels. The most common of them are previous swing highs and lows, which provide support and resistance in the market.
Important round numbers (with multiple zeros) also act as support and resistance levels. Other tools include pivot lines, Fibonacci retracement levels (38.2%, 50%, 61.8%, and 78.6%), trend lines, and long-period moving averages
These tools can show market levels where there are usually huge orders, especially opposite orders, which provide too much liquidity for the price to absorb.
Most of these are limit orders and take profit orders, as well as market orders from traders who have been on the sidelines waiting for the price to reach a particular level before entering a trade in the opposite direction.
Because of these huge orders, a pullback is highly likely to be forced to reverse at these levels.
However, swing traders don't just enter a trade because the price has pulled back to a potential reversal level.
They look for signs that the pullback has exhausted its momentum and a new impulse wave about to start.
Different traders use different tools to identify these signs. Some of them include:
- Candlestick patterns, such as pin bars, engulfing bars, and inside bars
- A divergence between an oscillator and price swing highs or lows
- Oscillator oversold or overbought signal
- MACD or OsMA signals
You must have any of these patterns or indicator signals when the price pulls back to an important price level before you can say there’s a signal to enter a trade. Both of the conditions must be present — a pullback to a reversal level and a trade setup. So, to catch an impulse wave in a trend, this is what you should do:
-Use tools like a trend line or a long-period moving average (say, a 200-period SMA or EMA) to identify the direction of the trend
-Observe the various price waves — impulse wave and pullbacks
-Attach the Fibonacci retracement tool, if necessary, when a pullback starts
-Wait for the pullback to get to a potential price reversal level, such as a support level (if it’s an uptrend) or resistance level (if it’s a downtrend), a trend line, long-period moving average, or a Fibonacci level
-Look for whatever constitutes your trade setup (candlestick pattern or indicator signal) in an uptrend, look for a bullish setup, while in a downtrend, look for a bearish setup
-Enter a trade in the trend direction when you see your trade setup, and place your stop loss above or below the preceding swing low/high — as the case may be
-Set your profit target at the next resistance or support level or a 100% or Fibonacci expansion level, which also function as a resistance/support level, so as to get out before the next pullback starts — you can switch direction and trade the pullback if there’s a trade setup, but it can be very risky
Note that a trade setup that occurs at a confluence of many factors — a support/resistance level, trend line, moving average, and Fibonacci level — has an increased chance of producing a successful outcome. The reason such a trade setup is called a high probability setup.
In the USDCAD chart below, the price was in an uptrend. An inside bar occurred when the price pulled back to the confluence of the trend line and the support level, and the price started rising again.
Notice the profit target at the 100% Fibonacci expansion level and note the position of the stop loss — the trade would’ve yielded about 2:1 or more reward/risk ratio. Observe how the price swung to the downside after the target was hit — a trend follower would’ve given back those profits.
The WTI Crude Oil chart below was in a downtrend. Notice that the setup occurred with a bearish pin bar at the resistance level. You can see how the price dropped afterward. The profit target was at the 100% Fibonacci expansion level.
Fading the move
To start with, we must warn you that this is a counter-trend trading, and, hence, it is a very risky approach.
However, some experienced swing traders still play it to capture some more pips from the pullback after riding the preceding impulse wave to its conclusion.
Thus, it is not usually a stand-alone strategy for most people. However, some contrarians — those that love going against the crowd — may adopt this as their main approach.
For swingers who know how to identify the right levels to fade a move, such trades do work on some occasions.
One of the most important factors when attempting this kind of trade is to identify very strong support or resistance level where price has been rejected several times in the past.
But previous price rejections at that level doesn’t guarantee that the price won’t break it the next time it reaches there.
So, you must look for signs that the price has reversed before attempting any trade.
To attempt this strategy, this is how you can approach it:
-Identify a strong resistance or support zone standing in the way of an advancing impulse wave — which ideally you should be riding to that point
-Watch what happens when the price gets there and look for signs of price rejection and reversal
-If there is a pin bar or an engulfing pattern, consider entering with the next candlestick and place your stop loss some pips above the swing high/low — as the case may be
-If the trade moves in your favor, quickly bring your stop loss to a breakeven point to prevent losing and aggressively trail your profits
-Place a profit target before the nearest support or resistance level — whatever is the case for your trade direction
In the GBPAUD below, you can see that a bearish engulfing pattern occurred at a known resistance level, and the price turned downward. The exit point was at the nearest support level but the profit should be trailed.
The GBPUSD chart below shows that the downward decline was halted at the support level. Notice the bullish pin bar that occurred which would’ve been an indication to go long and manage aggressively.
This strategy is based on the fact that the price tends to revert to the mean after it has made a decent move above or below the mean.
In other words, the price, like every other data, has a central tendency. With this approach, a swing trader tries to trade all swing types irrespective of the direction of the trend.
So, it’s a combination of “Catching the impulse wave” and “Fading the move.” But it is played with the help of a mean-reverting indicator.
Some of the indicators and tools that can be used for this strategy include the Bollinger bands, standard deviation, price channels, oscillators, and the volatility index (if you are trading the S&P 500 Index).
However, the Bollinger bands is the main indicator for this strategy. The Bollinger bands consist of three lines: a centerline, one band above, and another below. The centerline is a simple moving average, while the upper and lower bands are two standard deviations above and below the centerline.
Here is how to use the Bollinger bands for a mean-reversion strategy : When the price goes below the lower band, look for bullish reversal candlestick patterns like the bullish pin bar or engulfing patterns.
Place your stop loss below the swing low and take profit anywhere between the centerline and the upper band.
When the price climbs above the upper band, look for bearish setups — bearish pin bars and engulfing patterns. Place your stop loss above the swing high and look to take profit anywhere between the centerline and the lower band.
In the EURUSD chart below, you can see that two setups occurred at the lower band — the first one with a bullish engulfing pattern and the second one with a bullish pin bar.
Around the upper band, a bearish setup occurred with a bearish pin bar and an inside bar. Note that you take profit before the price gets to the opposite band.
Springs and Upthrusts
Springs and Upthrusts are very popular methods for swing-trading a ranging market.
At the basic level, the strategy is a false breakout at the upper or lower boundary of the trading range, which indicates that the price may head to the opposite end of the range.
Developed by a stock trader, Richard Wycoff, the strategy is very popular in the stock market, where it is normally used in combination with the volume data.
However, it’s better to combine it with candlestick patterns when trading the forex market.
A spring pattern is a false breakout below the lower boundary (support level) of the range, with the price immediately turning back into the range.
It indicates a price rejection below the support level. A spring has a more bullish implication if there is a bearish pin bar, bearish engulfing bar, or an inside bar when the pattern occurs.
Here is how to trade a spring pattern:
-When a spring pattern occurs with a bullish candlestick pattern, place a buy order at the next candlestick
-Put your stop loss below the low of the spring pattern
-Place your profit target a few pips below the upper boundary of the range
An upthrust is a false breakout above the upper boundary (resistance level) of the range, with the price turning downwards thereafter. It indicates a price rejection above the resistance level.
If there is a bearish pin bar, bearish engulfing bar, or an inside bar when an upthrust occurs, the setup has a more significant bearish implication.
When an upthrust occurs with a bearish candlestick pattern, place a sell order at the next candlestick
-Put your stop loss above the high of the upthrust
-Place your profit target a few pips above the lower boundary of the range
In the EURGBP chart below, the market was in a range from March to December 2015. You can see the inside bars and bullish pin bar that occurred with the spring patterns and the inside bar that occurred with the upthrust.
Swing traders love chart patterns a lot because they have measurable profit targets that can be hit within a few days to a few weeks.
Chart patterns are identifiable price structures seen on the price charts. Swing traders trade many of these patterns, but, here, we will only discuss the following:
Head and shoulder
The head and shoulder pattern is considered a reversal pattern for an uptrend but can also occur as an extended pullback in a downtrend.
The pattern shows that the price is unable to make a higher swing high, so it may be about to drop heavily.
This pattern consists of an initial swing high (the left shoulder), a higher swing high (the head), and a lower swing high (the right shoulder).
The right shoulder makes a lower high, which indicates that the previous advance may have come to an end.
Some swing traders may decide to go short as the right shoulder forms a lower high, especially if the preceding swing low made a lower low — in this case, they place a stop loss above the head.
However, it’s only when the price breaks the neckline —the trend line connecting the swing lows — that the pattern is considered complete.
A swing trader that enters a trade at this point can place the stop loss above the right shoulder. The profit target is estimated by measuring the height of the head from the neckline.
In the EURUSD chart below, you can see a head and shoulder pattern that occurred as an extended pullback in a downtrend. Observe the labeled parts and notice how the price stalled at the estimated profit target.
When a similar pattern occurs after a prolonged downtrend or an extended pullback in an uptrend, it is called an inverse head and shoulder pattern. This pattern is seen as a strong bullish reversal setup. Take a look at the GBPUSD D1 chart below.
Triangles are usually regarded as price consolidations before a trend continuation. However, the price can break out in either direction.
There are three types of triangles you can find on the price chart, namely: ascending, descending, and symmetric triangles.
An ascending triangle is formed when the swing highs keep a similar level, while the swing lows are ascending.
The descending triangle is the opposite — the swing lows are at the same level, while the swing highs are descending. In the symmetric triangle, the swing highs are descending, while the swing lows are ascending.
Since the breakout can occur in either direction, you may want to place stop orders on either side of the pattern, but false breakouts do occur often.
When trading this pattern, put your stop loss some pips above or below the opposite side of the pattern. Estimate your profit target from the height of the base of the triangle.
The USDJPY D1 chart below shows a symmetric triangle formed as the market consolidated between June and December 2015.
You can see that the price broke to the downside and dropped significantly below the estimated profit target, but a swing trader is mostly interested in the price hitting his target. Please note where the stop loss is placed.
Just like the name implies, a wedge is a chart pattern that looks like a wedge. The pattern resembles a triangle, but in a wedge, both the swing highs and swing lows are either rising or declining — with one side having a greater slope than the other.
There two types of wedges — a rising wedge and a falling wedge.
A falling wedge consists of gradually falling swing lows and steeply falling swing highs. It may indicate that the price may be about to reverse to the upside.
So, when the price breaks above the upper trend line, swing traders go long and set their stop loss below the lowest swing low in the pattern.
Their profit target is usually at a level equivalent to the size of the base of the wedge. See the GBPAUD chart below.
The rising wedge is formed when there’re gradually rising swing highs and steeply rising swing lows, as you can see in the chart below.
A rising wedge may tell a swing trader to get ready to short as the price may be about to turn downwards.
A break below the lower trend line is an indication to go short and place a stop loss above the upper trend line. The profit target is estimated from the height of the base. See the GBPNZD chart below.
Double top and bottom
The double top pattern is a bearish reversal pattern seen after a prolonged uptrend.
It consists of two swing consecutive swing highs at a similar price level, with a modest swing low in-between them.
A line connecting the intervening swing low to the preceding swing low is called the neckline, and when the price breaks below it, the pattern is completed, which is a sell signal.
When trading this pattern, a swing trader places the stop loss above the swing highs and puts the profit target at a level that equivalent to the height of the swing high, measured from the other side of the neckline. See the EURUSD H4 chart below.
A double bottom is a popular bullish reversal pattern that may occur after a downtrend. It consists of two consecutive swing lows that occurred at a similar price level and a moderate swing high in-between them.
A line joining the intervening swing high to the preceding swing high is called the neckline.
The pattern is completed when the price breaks above the neckline. Then, a swing trader can go long and place a stop loss below the swing lows.
The profit target should be the size of the swing low measured on the other side of the neckline. See the USDJPY D1 chart below:
Swing trading is the style of trading that aims to profit from individual price swings — up or down. There are many simple swing trading strategies available, but each works best in a specific market condition. Learn the ones we’ve discussed here, adapt them to the market you are trading to improve your trading result.