Hello, and welcome to another episode of the bulls versus the bears. Today Let’s do a little swing trading. In other words we are going to learn swing trading today. Swing trading is one of those trading styles that suits traders who want to spread their trading horizons. Swing trading helps you do the following: Allow you to hold your trades for two days or more, go out and smell the roses, and trade at a slower pace. In other words, if you are a day trader, and looking for other trading frontiers to conquer, swing trading could be your next trading front.
I mean let’s look at it this way. It’s tough enough finding the right forex strategy. Right? Then you have to twist your brain dealing with even more complicated issues such”Where Do I Start?” and “How Do I know Whether I’ve found the right strategy?”. This is enough to give anybody a major migraine of a headache. And considering the countless number of trading strategies littering cyberspace like satellites in outer space, you’d have to be Houdini to be able come up with all the answers. Add the long trail of technical indicators,and you’ve got yourself an even messier mess.
But the good news is swing trading will solve all this confusion for you. If you’re the type looking for a trading style that will eliminate all that confusion in your head then swing trading could be what you’re looking for. We’re going to define what swing trading is all about, and then we’ll look at few ways as how to profit from swing trading.
But first off:
What is Swing Trading?
Well, swing trading is basically looking to profit from swings in the forex market utilizing highs and lows in the uptrend and down trend. You are looking to identify swings in the forex market and make your entry only when there is a high probability of profiting from a trade. So if you are in an uptrend, looking at swing lows, you may want to go long(or buy). On the flip side, if the market is in a downtrend, also staring at swing lows, it makes logical sense to got short(or buy) Remember when we dealt with HH HL, LH, LL in Trade Trends Using Price Action Analysis? That’s basically what swing trading is all about.
There are a few things you should be able to master as a swing trader. First you should be able to identify the past and current trend on the price chart and as certain if the trend is still in one piece or not. And he should be able to establish whether there could be a potential reversal once the said trend is broken or the players run out of steam. Also you should be able to identify the previous upswings and downswings of the price. By the way, these upswings can transform into support and resistance levels where price can ricochet up and down in the future. Not only that, but you should be able to identify the support and resistance levels. Let’s look at the price action of the EUR/AUD
This,ladies and gentlemen, is the price action of the EUR/AUD between January 2015 and April 16.Notice all the highs and lows swinging all over the place between that time period. The uptrend and downtrend look well-defined. See the way the support level zone is well laid out? The bulls are bouncing of it, and the bulls are launching off it. Seems like a lot of activity going on here.
How Do I Enter A Swing Trade?
Well, you can do it a few ways. First trade the uptrend just when the downtrend is running out of steam. Why? So you can rake in your profits in the next upswing session. And when you are trading in the downtrend, How do you enter the swing trade? You guessed it, just when the swing on the uptrend is running out of steam and blowing fumes. And Why? so you can cash in on the next bears excursion down the slope as the price takes a dive. Let’s see an illustration of a swing trade in price action, using the AUD/USD pair.
Ladies and gentlemen, this is the Aud/USD pair in swing action. Notice the bullish engulfing labelled in blue at the end of the bearish swing?This is where you enter your trade. You enter your trade just when the bears are fizzling out.
Now look at the white arrow at the beginning of th bearish reversal, led by the bearish harami. That’s about the same time the bulls start to fade. And when that scenario unfolds,you enter your trade. You should have no problem cashing in on the bears slalom run.
Now just to make life more easier for you, I’m going to give you six tips on how to swing trade. Starting with:
Stick With The Daily Time Frame
You’d be better off if you stick with the daily time frame. Why?because the daily charts in this time frame paint a much accurate picture as what is happening with the price action and they provide more reliable price signals. Now I know some of you are itching to jump into the 4 hr timeframe.But just like anything in life,one step at a time.
Once you master the daily time frame can then move on to the 4 hr time frame and beyond till your heart is content. Price action signals become more reliable as they moe up from lower to higher time frames. If you wanna learn how to choose a time frame to trade in, Read up on Looking at The Big Picture Using Multiple Time Frame Analysis.
Next Up is :
Draw Key Support and Resistance Levels
You absolutely have to draw key support and resistance levels. I’m sure you are familiar with key support and resistance levels. It’s probably the most important component of the swing trading process.
Support and resistance levels are akin to laying a foundation to a house. Without these two tools, it will be difficult to find favorable wing trades. There are two levels of support. The first one is:
Horizontal Support and Resistance
Horizontal support and resistance is the most basic levels on the price charts. At the risk of repeating myself, they lay the groundwork for trading swings in the forex market.
nd you can find some of the best trading opportunities in these areas. If you’re looking for ideas on how to draw horizontal support and resistance, Look up Identify Support and Resistance Levels Using Price Action.
Next up is:
Please, what ever you do, do not ignore trend lines. If you do, you will creating a huge gap, the size of a Black Hole in your forex trading knowledge. Now some of you are like”Why do I need to know how to draw trend lines?” Because not only do they help you identify trends, but they also help spot reversals before they actually happen. It’s like spotting a hurricane before it makes landfall.
Now I believe we’ve already covered trendlines in my post Drawing and Trading Trend Lines. If you want to learn how to draw and trade trend lines, I strongly suggest you read the above post. You would be the better for it.
Assess Trend Momentum
It’s absolutely crucial that you assess trend momentum when trading swings on the forex market. You will definitely need them when looking for swing opportunities on the charts. You will be looking at three types of momentum changers when hunting for swing trades.They are:
- Uptrend:Higher Higher highs and higher lows.
- Downtrend:Lower highs and lower lows
- Range:Sideways movement- I suggest you read up on Forex Market Goes Sideways.
We’ll look up graphic illustrations of each of the three momentum changers. Starting with:
Uptrend:Higher highs and higher lows
You should know by now that whenever the bulls are in an uptrend, they carve out higher highs and higher lows(HL, HH). You see how each swing point is higher than the previous one?
If you want to be a buyer in this bullish momentum you absolutely have to gobble up these swing opportunities. You’d be committing forex trading malpractice if you pass up on such huge opportunities.
Next up is:
Downtrend:Lower Highs and Lower Lows
When the market is in a downtrend, the bears carve up lower highs and lows. Notice how the swing points start with lower highs and then descend down to lower lows. That suggests the bears are depressing the price for all its worth. In such a scenario, that;s your queue to put in your entry sell trade.
Of course you’d have to enter at a lower high-around the same time that the bulls are fizzling out. You’d need your head examined if you pass up on this opportunity.
As I indicated earlier, if you want to brush on your trend trading, look up Trade Trends With Price Action Analysis. You can also look up Drawing and Trading Trend Lines.
Last but not least is:
This is pretty much self-explanatory.This is where the forex market skids sideways within a range. Basically you have a war of attrition where both buyers sellers are caught in a trap trying to figure out their next move. Bullish and bearish momentum have come to a screeching halt. However, it’s possible swing trade opportunities thanks to the defined support and resistance levels. In
Just take a look a the bearish pin bar breaking through the level of resistance and th bullish pin bar doing like wise at the level of support. In both scenarios, you’d do well to enter your trades. However, make double sure the coast is all clear before you enter your trades. Or else, the choppy waves of the sideways range will eat up your trading position.
For more information on trading ranges, look up Forex Market Goes Sideways.
Look Out For Price Action Signals
You do not want to ignore price signals in the swing trading process. Think of them as the message alerts of the price action. They let you know whether your trading edge is present on the charts. In case you’ve forgotten your trading edge represent conditions on the forex market that need to be present for you to enter your trade. A very good place to look for price signals is at key levels of support and resistance.
For instance if you happen to see the bulls in an uptrend you’d do well to find price signals at level of support. Why? Because bulls in the uptrend start their mountain climb at the support level. So it would make sense to look for price signals within that locale. Two great candlestick patterns are to look for are pin bars and engulfing candles. Let’s take a look at graphic examples of these two patterns. Starting with
This is an example of a bullish pin bar at key levels of support. Notice the higher low pin bar labelled with a green arrow at the level of support? That’s what you call the higher low. As you may have noticed the pin bar has a long tail and a slim body. So when you see this pin baring its majesty, that’s a signal for you to get ready to enter. Wait for confirmation from the next candlestick before you enter. The whole idea is to use the pin bar signal to make a trade. As you can see, the bulls are swing upward.With this scenario, you should make handsome profit.
On the flip side, if the bears take over the market, you want to look out for sell signals along the key level of resistance. Take a close look at the bearish pin bar labeled with a green arrow at the key level of resistance. That’s the lower high . or swing high.And That should alert you to get ready to enter.However wait for confirmation from the next candlestick just in front of the smallish pin bar before you make your entry trade. Jump in too soon, and you’ll get your fingers burnt.
Please don’t go looking for setups. Let them find you instead. You do not want to sit in front of your screen all day hunting for setups.If you find some, that day is your lucky day. If, not you live to trade another day. Trying to force trades that don’t exist is a recipe for disaster.
For more information on looking for price signals look up Price Signals: Weeding the Chaff from the Good.
And for more info on pin bars and the engulfing candle look up The Pin Bar Strategy and Dual Candlestick Patterns.
Next Up is:
Plan Your Exit
When I say plan your exit you need to identify your exits. You don’t want to get too greedy out there. So when you make your profit, listen to that still small voice telling you “Get outta here!” Now there are two rules you need to adhere to when it comes to identifying your exit points. First, you need to have a defined profit target and a stop loss level. Please do not follow the crowd by only setting your profit target and dumping your stop loss in the trash. GREED DOESNT PAY!.
The second rule is you need to follow both these rules before you even fantasize about risking your money. It’s very important that you be very objective about this. Why? because if your emotions get in the way of following these two rules, your account may end up being a black hole. You end up placing your profit targets at levels that benefit your trade instead of listening to what the market is trying to get across to you. In other words,your emotions override your logic.
So How Do I Identify My Exit Points?
Easy! Use the support and resistance levels like we discussed earlier. Remember the pin bar illustration we used earlier?That’d be a great pattern to use to identify your exit points. If you need a refresher. Go over it again. Let me show you a fairly easy way of determining a swing profit using the pin bar illustration we discussed earlier.
Now let’s take a look at the very first resistance level. You can place your take profit just above the resistance barrier. The whole idea of the pin bar strategy is to catch the majority of the swing surge. You do not need to catch the entire swing to make your profit. Just get confirmation from the second candlestick and then catch the bullish wave.
You use the same rationale with the bearish pin at the support level, You place your profit target in and around the support barrier.
Apply Risk Management
Now that you’ve identified your profit target and stop-loss, it’s time to apply some risk management. What you’ll be doing is calculating your risk and identifying your profit target and stop loss. You absolutely have to if you want your sanity in one piece. Let’s get started with
Calculating Your Risk
.When calculating your risk, you’ll be doing two things – setting your stop loss and profit target. You absolutely have to do this if you value your sanity. Anyways, about the stop loss: If you are using the pin bar, the best place the pin bar is above or below the tail. Let’s look an illustration below.
If you are using the bullish pin bar(on the left) setup just place your stop-loss below the tail as indicated by the arrow. However, if you want to play with the bears(on the right) place your stop loss above the tail of the pin bar. This way your trades don’t take a major hit.
The same strategy applies when trading the bullish and bearish engulfed patterns. Let’s watch an illustration
With the bullish pattern, you place your stop-loss just below the bullish candles tail while. But if you’re playing with the bears stick your stop loss above the tail. When trading both bullish and bearish engulfing patterns,make sure the your stop loss is about 10 to 20 pips below and above respectively, the candlesticks being traded. Straight forward. Isnt it?
Now that we’ve figured out how to place your stop-loss:
How Do I Determine Profit Target?
Well the most logical place to place your profit target is between support and resistance levels.That’s where the swing trading action is at. Remember that your main objective as a swing trader is to catch the swing trading opportunities between the support and resistance levels.
So when you catch a bullish pin bar forming at the level of support, start looking out for the key of resistance. Your conclusion should help you determine where to place your next profit target. If there is no pin bar showing , just sit on the bench and wait for the next trading opportunity. Let’s see how to place the profit target at both support and resistance.
As you can see, the profit target at the support level is set above the tail. While the profit target at the resistance level is set below the tail. If you see these two setups. you set your profit targets. Simple as ABC. So if you want to learn risk management look up Practice Risk Management or Die as a Forex Trader.
That’s a wrap for ” .” As you can see swing trading can be very beneficial. But you need to ask yourself the following questions
- Do I want to hold my trades for more than two days?
- Do I desire freedom to smell the roses?
- Do I want to trade at my own pace?
If you answer yes to all these questions, then swing trading is for you.
Til next time take care.
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