The Swing Trading Strategy Guide for 2022

Admirals
30 Min read

You may have heard the term swing trading being used amongst traders, but do you know what it is? In our swing trading strategy guide, we will delve deeply into the topic, explaining exactly what swing trading is, highlighting popular swing trading indicators, presenting some effective swing trading strategies and much more!

What Is Swing Trading?

The financial markets are hugely diverse, and there are many different ways to attempt to profit from them. Alongside the large variety of available trading strategies, there are also different trading styles. One of the main variations in trading style is the time frame over which you trade.

At one end of the spectrum, there are long-term traders; people aiming to follow extended trends which can last months or even years. One of the key advantages of long-term trading is that it offers the potential for large profits. However, like all other forms of trading, there is potential for losses as well.

Additionally, long-term trading will often not require much attention beyond a small amount of monitoring each day. But it does require more patience, and will likely offer less frequent opportunities to trade.

At the other end of the spectrum are scalpers. Scalpers make numerous short-term trades - often lasting just a few minutes – with the aim of making small profits on each trade.

There is an advantage to the extremely short length of these trades - namely, curtailing your exposure to the market. Also, because you are only looking for very small price movements, opportunities for trading are plentiful.

The downsides of scalping include:

  • A huge investment of time and attention
  • The requirement for extremely well-run and disciplined exit management
  • Transaction costs can be significant due to the high number of trades

One step up from scalpers are day traders, who hold positions for a few hours but no longer than a day - thus avoiding exposure to any market-moving stories that may break overnight.

Swing trading sits somewhere in between day trading and long-term trading, with trades lasting anywhere from a few days to a few weeks. The swing trader is essentially looking for multi-day chart patterns to benefit from bigger price moves, or swings, than you would typically get in one day.

Many people find this style very appealing because it offers an acceptable compromise between the frequency of trades and the associated time demands.

Advantages of Swing Trading

There are several advantages of swing trading, some of which we will look at below.

Time: Short-term trades require constant monitoring. On the other hand, long-term trades may not be active enough for some people, and require a lot of trading discipline. A swing trading strategy tends to appeal to beginners, simply because it operates over more user-friendly time frame.

Benefiting From Longer Trends:While scalping and day trading rely on short-term volatility, swing trading allows traders to take advantage of longer term trends. Analyses performed on larger units of time are often sounder, whereas shorter-term trading is more vulnerable to noise and false signals.

This also means that each trade has more time to generate a profit, due to trades following longer trends affecting prices.

Cost Efficiency: One of the main costs of trading is the spread, or the difference between the buy and sell prices of an asset. While spreads are very small, they get charged every time you trade and can, therefore, eat into profits when trading frequently. For swing traders, the spread matters less because they place fewer trades and over longer time scales.

Disadvantages of Swing Trading

What are the main disadvantages of swing trading?

The accumulation of swap fees: Swaps are fees which are charged on CFD positions held overnight. While these aren't an issue for scalpers or day traders, these fees can add up for longer-term trades.

Fundamental risk: Economic and political events outside trading hours could impact the financial markets to disrupt a trend and negatively affect your swing trading strategy.

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Swing Trading Strategies

Swing trading is a style, not a strategy. The time horizon defines this style and countless swing trading strategies can be used. As such, it can be challenging to identify the best swing trading strategy in Forex.

The following strategies are not exclusive to swing trading, nor indeed to Forex, and, as with most technical strategies, support and resistance are the key concepts behind them. In the following sections, we will outline three swing trading strategies to consider using in 2022.

Trend Trading

One easy-to-follow swing trading strategy for beginners is trend trading.

When identifying a trend, it's important to recognise that markets don't tend to move in a straight line. Even when following a trend, they move up and down in step-like moves.

We recognise an uptrend by the market setting higher highs and higher lows, and a downtrend by identifying lower lows and lower highs.

 Depicted: Admirals MetaTrader 5 - AUDJPY Daily Chart. Date Range: 6 August 2019 – 21 March 2022. Date Captured: 21 March 2022. Past performance is not a reliable indicator of future results.

 

The chart above shows an uptrend, starting in March 2020 and lasting around 12 months moving in a typical zig-zag pattern. Although the trend is bullish, there is a section, highlighted by a red square, where a retracement takes place.

During this period the market is not setting new highs, whilst lows are falling. After this period, running against the main trend, the uptrend resumes.

With this swing trading strategy, we are looking to catch the bullish trend we have identified but only when we are confident it is set to continue.

How long will a pullback persist? We have no way of knowing. Instead, we look for confirmation that the market has gone back to its original trend.

In other words we:

  • Look for a trend
  • Wait for a countertrend
  • Enter the market after we see the counter trend has played out.

In this case, the tell-tale signal that we are seeking is a resumption in the market setting higher lows.

One version of this strategy would try and run the trend for as long as we can. In this version of the strategy, we do not set a limit. Why not? We don't know how long the trend might persist, and we don't know how high the market can go. So, we will not try to make a prediction by setting a price target.

You have to wait, observe and allow the market to move adversely to some degree. It also means that when the trend breaks down, you will have to give back some of your unrealised profits before closing out. But that could be more than made up by riding a trend for longer.

Counter-Trend Trading

This next swing trading strategy is the opposite of the first one. We use the same principles in terms of trying to spot relatively short-term trends but now try to profit from the frequency with which these trends tend to break down.

We saw previously how an early part of a trend can be followed by a period of retracement before the trend resumes. A counter-trend swing trader would try to catch the swing in this period of reversal.

To do so, the swing trader needs to recognise the break in the trend. In an uptrend, this would be when a fresh high was followed by a sequence of failures to break new highs - we would go short in anticipation of such a reversal. The opposite is true in a downtrend.

When counter-trending, it is very important to maintain strong discipline if the price moves against you. If the market resumes its trend against you, you must be ready to admit you were wrong, exit the market and draw a line under the trade.

Moving Average Swing Trading Strategy

In the chart below, the red and green lines are both moving average indicators (MAs):

  • The red line represents a simple moving average of 25 periods.
  • The green line represents a simple moving average of 100 periods.
Depicted: Admirals MetaTrader 5 - EURUSD Daily Chart. Date Range: 20 November 2020 – 21 March 2022. Date Captured21 March 2022. Past performance is not a reliable indicator of future results.

 

The method we are using to identify market movement utilises both moving averages. Together with this indicator as our swing trading strategy input signal, we use a stop loss and take profit.

When the red line crosses the green line, it suggests that we can see a price change in the direction of the crossing, and it is our signal to enter the market in the direction of the price change.

In the graph above, the shorter red MA crosses the longer green MA on three occasions, all highlighted by red vertical lines.

On the 17 March 2021 and the 5 July 2021, the red MA crossed below the green MA. This is providing a signal to sell. On 13 May 2021, the red MA crossed above the green MA, providing the signal to buy.

It is important to bear in mind that, with this swing trading strategy, due to the lagging nature of the MA, the trend will start before we receive our signal.

A Versatile Strategy

If you would like to take an even deeper dive into swing trading and learn a versatile swing trading strategy that beginners can use, check out our previous webinar on the topic:

Improving Your Swing Trading Strategies

There are several things you can try to improve your swing trading strategies. The first is to try to match your trade with the long-term trend by looking at a longer term chart. Try and trade only when the direction matches that of the long-term trend.

Another way to improve your strategy is to use a secondary swing trading indicator as a filter. For example: if you are a counter-trender and are considering a short position, check the RSI (Relative Strength Index) and see if it signals the market as being overbought.

A Moving Average, like we looked at earlier, is another helpful indicator you could use to help your swing trading strategy. An MA smooths out prices to give a clearer view of the overall trend. Also, because an MA incorporates older price data, it's an easy way to compare how the current prices compare to older prices.

When the Trends Turn Against You

What happens if we don't close a swing trade in time?

There can always be unexpected price changes in the market, therefore, we must always adopt good risk management. Let's look at this with an example involving the GBPUSD currency pair.

Depicted: Admirals MetaTrader 5 - GBPUSD H1 Chart. Data Range: 14 June 2016 – 29 June 2016. Past performance is not a reliable indicator of future results.

 

If we were following the moving average swing trading strategy we looked at earlier, we would have received a buy signal on the 16 March 2016 when the red MA crossed above the green MA.

In the early hours of 24 June 2016, the results of the UK’s Brexit referendum began to become evident.

What was the result? The value of the British pound sank and the GBPUSD fell several hundred pips in less than one minute.

If we had maintained a long position, without proper safeguards in place, we would have been trapped in a very bad trade.

Good risk management in swing trading strategies is essential. If we do not set our objectives correctly, with a take profit and stop loss order, an adverse market movement can occur that causes us to lose a large part, or even all, of our capital.

The Best Swing Trading Indicators

There are many swing trading indicators you can use to improve your chances of success, here are a few of our favourites:

Top Tips for Forex Swing Trading

Now that you know the basics of swing trading, and some Forex swing trading strategies, here are our top tips to help you succeed as a swing trader.

  • Align your trades with the long-term trend. Although you may be looking at a shorter-term time chart (e.g. H1 or H4), it may also help to look at a longer-term chart (D1 or W1) to get an idea of the long-term trend. Then you can try to ensure you aren't trading against a larger trend. Swing trading is much easier when trading with the trend, rather than against the trend.
  • Make the most of Moving Averages (MAs). The MA indicator can help your swing trading strategies by smoothing shorter-term price fluctuations in order to identify the trend.
  • Use a little leverage. Leverage allows you to access a larger position than your deposit would typically allow, amplifying your profits (and losses). When used wisely, leverage can help you make the most of winning trades. But it must be used with caution.
  • Trade a wide portfolio of Forex pairs. Watch as many currency pairs as you can to find the best opportunities. The Forex market will always offer you trading opportunities, you must look for the ones that best match your style, strategies and risk-tolerance. Trading a range of pairs will help diversify your portfolio and avoid the risk of having all your eggs in one basket.
  • Pay attention to swaps. Swaps are an interest charge made for positions held overnight. The cost of these swaps must be taken into account to better manage your money.
  • Put aside your emotions. It's better not to trade with emotion, but to execute your swing trading strategy as a part of a well-established Forex trading plan.

Final Thoughts

Swing trading is a style suited to volatile markets, and it offers frequent trading opportunities.

While you will need to invest a fair amount of time into monitoring the market with a swing trading strategy, the requirements are not as burdensome as trading styles with shorter time frames. Moreover, even if you prefer intraday trading or scalping, swing trading strategies will provide you with some diversification in your results as well as offering potential additional profits!

Having said that, swing trading is not right for all traders, so it's always best to practise first on a risk-free demo trading account. Sign up today for a demo trading account from Admirals by clicking the banner below, and start testing your swing trading strategies on the markets:

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About Admirals 

Admirals is a multi-award winning, globally regulated Forex and CFD broker, offering trading on over 8,000 financial instruments via the world's most popular trading platforms: MetaTrader 4 and MetaTrader 5. Start trading today

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks

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