Swing Trading Techniques

Trading swings is a trading strategy that can generate high returns in a short period of time. Here is a strategy that will help you make money with swings.

What is a swing?

A swing is a part of a trend. When the market moves up or down, it rarely moves in a straight line. Instead, the market moves in zigzag lines. The market advances two steps, and then takes one step back. That’s the typical characteristic of a trend.

Each of the steps forward or back is a swing. The market will constantly form new highs and lows. Every movement from high to low or from low to high is a swing. Any financial investor has to decide whether he wants to trade a trend in its entirety or profit from each single swing.

Depending on whether a trader decided to become a swing trader or a trend follower, he should base his trading strategy on a fundamentally different basis. Some indicators are perfect for swing traders, but almost useless for trend followers, and vice versa.

How to trade swings

Swing traders need to use a special type of technical indicator. Technical indicators in general are categorized into leading and lagging indicators. Lagging indicators, such as moving averages, indicate market movements that already happened. To a swing trader, this type of indicator’s usefulness is limited.

For the most part, swing traders rely on leading indicators. Those indicators indicate market movements before they happen. A good swing trading technique will rely heavily on leading indicators. If you encounter a strategy based on lagging indicators as a swing trader, you know that it is not for you.

Most leading indicators are oscillators. They aggregate market data to determine the strength of the current movement by setting the market volume in relation to the market direction. For example, a swing trader could use the money flow index (MFI), the on balance volume, or any similar indicator to judge the strength of a movement.

During any movement, a lowering volume is considered a sign of a weakening movement. Oscillators can use this indication to judge the strength of the current movement.

As long as the current movement is still going strong, a swing trader should invest in the direction of the current movement. Is the movement weakening, he should no longer invest in it and instead start looking for signs of a turnaround. As soon as the turnaround happens, a swing trader should invest in the new direction.

During sideways movements, this strategy works well and should be able to generate profits. During a trend, however, swings in trend direction are more lucrative then swings against the trend direction.

While it is generally possible to trade both directions successfully, some traders choose to only invest in swings in trend direction during a trend. As with anything in trading, there is no definite right or wrong strategy. If you choose to only trade swings in trend directions, you need a way to find the right direction to invest in. You could do so manually by simply monitoring the market and judging whether it is in a trend or not visually.

If you plan to trade a large number of assets, however, checking each asset’s trend manually can become a time consuming task. In that case, and if you are programming your own signals or robot, you need a way to automate the evaluation process.

Lagging indicators can help you with that. Moving averages, for example, are perfect to determine the dominating market direction. You could make it a rule to only trade swings in the direction of the moving average. For this strategy, make sure to validate whether the market is in a trend or not by using the three moving averages crossover technique or a similar way to judge the existence of a current trend.