Swing trading is a strategy that aims to capture gains from short-to-medium term price movements in securities over periods ranging from a few days to several weeks. By analyzing technical indicators and market trends, swing traders seek to identify optimal entry and exit points for opening and closing trading positions.
Determining Swing Size
One of the most important factors in swing trading is determining the appropriate “swing size” – the typical price volatility range for the asset in question. This helps traders filter out normal fluctuations from significant trend movements. Computer backtesting on 3-5 years of historical data can establish average daily/weekly swing sizes.
For example, below is an example of BTC USDT on a weekly timeframe showing $8100.00 change 40% to 50% of swing sizes. Having too small or large a swing can result in too few or many signals respectively.
Entry and Exit Signals
Traders enter long positions when the market price moves above the high of the recent swing, or enter short when it moves below the low. Below is a provided example of entry rule using daily closes. Stops are also placed outside the opposite side of the swing range.
Trend Identification
It’s important to determine if the market is in an uptrend or downtrend before entering. This avoids whipsaws. An uptrend is confirmed if each successive swing high and low is higher than the previous. The opposite confirms a downtrend. Traders would then look to enter in the direction of the broader trend.
Managing Positions and Risk
Proper position sizing and risk management are crucial. Expert traders recommend waiting for deeper pullbacks or retracements like the 61.8% Fibonacci level on daily charts to enter, improving the risk/reward. Profits are taken at prior swing highs/lows or other technical indicators. Stops are trailed as the position moves in favor to lock in gains.
Backtesting and Optimization
The need for thorough backtesting on historical data to test, improve and optimize different aspects of a swing trading strategy like swing sizes, indicators, time frames etc. This helps uncover high probability patterns unique to each market. Proper testing also establishes realistic expectations of profitability and risk.
In conclusion, swing trading works best by identifying markets with a tendency to trend over periods of 1-4 weeks and carefully selecting high confidence setups based on key price levels, trends and technical analysis. Solid risk management and strategy optimization are paramount to its success long term.