Swing trading is one type of trend tactics that involves opening positions in the direction of the price movement at the bottom of local pullbacks. This trading model is interesting because, with strict adherence to risk management rules, the number of losing trades in relation to winning ones is relatively small, and the strategy is understandable even for a beginner trader.
Swing trading is a general term for a trading model that involves using pullback moments (corrections) during the formation of a trend.
The essence of the swing trading model
The essence of the swing trading model is as follows. If there is a clearly defined directional price movement in the market, logic suggests that it should be utilized.
But where is the guarantee that the trend won't reverse at that moment and the attempt to 'jump on the last wagon' will fail? Swing trading involves opening a position during a trend correction.
For example, in a rising trend, the price has pulled back slightly and at some level turned back towards the main movement. At this moment, it is clear that the price will at least return to the previous level (it is important to distinguish between a correction and a reversal).
Schematic representation looks like this:
The essence of the swing trading model
We look for the beginning of a trend, waiting for a pullback.
At the bottom of the first pullback, we open a long position (yellow points) with the expectation that, when the trend continues, the price will reach at least the previous maximum.
We close the position at the first clear hint of a reversal (I will talk about tools that help find reversals below). We do this throughout the entire rising trend.
After the peak, we see a clear long descending segment - we do not open a position. We wait for the next reversal, see that the rising trend is weak, meaning a descending movement has begun, and at the upward correction (green point), we open a position.
Advantages of swing trading:
Universality and frequent signals to enter the market. Swing trading involves opening positions during corrections in any direction. The trader earns on short-term movements, opening positions at the extremes of corrections, so the direction of the trend is not important to the trader; it is important to distinguish between a correction and a change in the direction of price movement.
Quick results of trades. Swing trading is short-term trading, and the effectiveness of the trading strategy is evident within a few hours. This is also a plus from a psychological perspective. If the trader sees a mistake within a few minutes, they quickly close the losing position and change the direction.
No swap costs. A swap is a fee for carrying open positions to the next day.
Disadvantages of swing trading:
Relatively small profitability in points per trade. A swing trader enters the market on pullbacks at a better price and closes the position at the next reversal. One movement averages 5-15 points depending on the timeframe, while intraday strategies can yield profits within the average volatility of over 20 points. The yield of a trade is lower only in scalping.
The need for a deep understanding of market behavior, constant monitoring of news. Local corrections can be caused by fundamental factors or the influence of institutional investors, market makers. The trader must understand the nature of the current movement. Therefore, they must keep track of the news and possess some degree of intuition and flexibility to quickly turn the situation to their advantage.
Psychological burden. The trader must identify the trend, constantly look for the best entry points, and close positions in time. Constantly being at the computer causes fatigue, distraction, and emotional tension.