Swing trading is all about staying in a trade in order to catch the larger movements in price over several days. Not only does the technique require patience but also a good understanding of risk management as well as a solid trading plan in order to place stops as the trade begins to move your favour. Swing trading also involves reading currency markets in order to take trades as a trend begins to take hold. This can be done using several techniques but begins with the fundamentals of how trend develops, from the end of one price swing to another. The inception of a trend is normally following the ending of a previous price swing when the market flattens and trades in a range whilst bulls and bears fight for the dominant direction. Whilst ranging markets are not favourable for swing traders, they can offer good opportunities for breakouts signalling the start of a new price swing.
Swing trading using Elliot wave theory
Many swing traders are big fans of Elliot wave analysis which explains why currencies move higher in a trend and then pull back to correct at intervals along their way. The smaller swings and corrections within the trend are known as waves and this is where swing traders may hope to add to their positions. Elliot wave theory consists of 5 waves which swing traders count in order to know when an up or down trend is likely to end.
The first of these waves is the ending of a trend in the opposite direction, either through a consolidation period, market reversal or breakout. The ideal situation to enter is on the pull-back of this which forms the second wave, buying or selling against the market and hoping that this is the start of a new trend. A number of techniques can be used to analyse these pullbacks in order to find a good entry to catch the next major price move. This includes watching for candlestick or price patterns which indicate that this is only a temporary correction and the market has changed direction. The third wave is the often the most powerful and the pull-back from this and subsequent fifth wave mark the end of the swing before a more substantial correction.
Trading with trend lines
Trend lines are a swing traders best friend. Not only do they confirm that price is trending but they also mark out key areas of future support for the trend to continue. Linking the lows or highs of the pull-backs in a trend as mentioned above using Elliot waves should result in a diagonal line forming the ‘spine’ of the trend. Trends within the first few waves should find support at these levels and the number of traders seeing these trend lines forming reinforces their strength. Although these are visible on any timeframe, the larger timeframes give more significance to these levels. Swing traders often trade the 4 hourly or daily charts in order to catch the really large price movements, aiming to buy into the trend when price action indicates that the trend line continues to act as a solid support level. This is one of the most effective ways to “buy in to the dips” of a larger swing strade and will ensure the optimum entry.
Swing trading stops
Swing trading is all about managing a position over a period of time. This includes moving stop losses to protect profits whilst still allowing the trade space to breathe. A simple technique used by swing traders is to place stops behind the nearest support level with the theory that once this support is breached the trend may be nearing an end. Using trailing stops such as this will not only protect profits but act as an objective exit in long trades in order to protect a trader from simply holding on to a position beyond the trend and for too long.
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