The Best Swing Trading Strategy

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Which swing trading strategy will make you profit?

Do you know what swing trading is? Do you have a profitable swing trading strategy?

If not, you should. In this article I’ll teach you some swing trading techniques that will enable you to ride some monster moves in the market.

The strategies I am going to teach you can be used on Forex, indices, oil, gold, stocks / equities and more. The underlying principles for trading each market are the same.

Most swing trading strategy guides are limited to the following:

  • Take a chart where a swing trade has already happened.

  • Tell you where you should have gone long / short.

A chart showing a swing trade in hindsight.

I have always hated this type of ‘teaching’. It makes trading look far too easy. If you have been trading you will know taking a trade before knowing what happens is a lot harder. If we could trade in hindsight we would all be rather rich.

As with any strategy we want it to have ‘an edge’ – a positive expectancy. Basically one that will generate us consistent profits over the long-term. We also want one that ideally allows us to effectively manage our risk. One factor that can dramatically increase a strategy’s profitability is legitimately (not strangling the trade!) being able to move stop losses in and reduce our risk / exposure. Smaller losses = greater profitability.

We have taken hundreds of swing trades over the years in our Live Trade Room and have a trading system that works on different instruments and time frames. The examples used in this article, just like in our Breakout Strategy Guide, are trades we took in our Live Trade Room.

You need to learn what a swing trade looks like as it is setting up, as well as having a profit-taking method that can turn shorter-term trades into monster swing trades.

This starts with identifying areas in the market where there are potential swings from i.e. where it is likely a large move will start from, or continue from.

That presents us with two main types of breakouts (regardless of time frame). Ones which are with a trend (breakouts which we use a similar strategy to our Breakout Strategy Guideand reversals, where the market changes direction and moves a significant distance.

Swing trading strategy

If you would prefer to watch a 15-minute YouTube video explaining this guide, then it’s here:

Reversal Swing Trading

Let’s start off by looking at a reversal swing trade. These are particularly effective on indices because, as you may know, indices like to go up more than they go down.

Don’t believe me, let’s look at the last 35 years of the Dow Jones Industrial Average:

A longer-term chart showing the last 35 years of price action on the DJIA.

See, it likes to go up! 

Ok, so how can we take advantage of this knowledge? Well when indices sell-off, for whatever reason, that usually presents an opportunity to get long. We have had lots of 1000 point trades on the DJIA, so let me use one 1000 point example to teach you about reversal swing trades. 

Here is the video I am going to break down: 

Step one: Identify a reversal zone

There are various ways to identify areas where the market is likely to reverse. Support and resistance is a powerful method, but here I am going to teach you a way few people know about, and that’s by using the RSI along with some market judgement. 

Let’s break down the trade featured in the above video. 

So here we have a strong down trend on the DJIA. We have not been able to get with the down trend for whatever reason on this occasion (which is no problem, there’ll always be a new trend!). 

Criteria one: Relative Strength Index

We are looking to pick a bottom but we need a reason to do so. This is where we use the RSI (relative strength index) and a positive gap us to give us an entry.  

Let’s look at the 14 period RSI first. 

A chart showing a market making-lower lows whilst the RSI makes higher-lows.

Notice how the market is making lower-lows, yet the RSI is making higher-lows. This is called ‘divergence’. 

What it is indicating to us is that the momentum is coming out of the market. This is often an early indication that the market will reverse. 

However, we are not just going to get long because of divergence, we want another indication to support the divergence. This is called confluence. We want a positive gap in the direction we are trading. 

Criteria two: An opening gap

On the chart below look at the 4th. There is positive opening gap. Gaps, of this nature, occur when the market opens at a different price from where it closes. 

This is a bullish indication i.e. it suggests the market will rise. 

Combining the RSI and positive gap gives us a foundation to believe there will be a reverse of the trend and potential swing trade. The final criteria is looking for an entry. 

Criteria three: The entry

For fine-tuning the entry, we came down to a 5-minute time frame. We needed a trigger and we got it by taking a break of the high. Our Breakout Strategy Guide goes into more detail about these types of fine-tuned entries. 

A DJIA 5-minute chart showing our trade entry.

Now the way I like to turn my trades into a potential swing trade is to scale-out of a trade. This is where you only close a partial part of your position. 

Say you are long 2 contracts, when the market rises to a set profit target you would close-out one contract and leave the remaining open (if spread betting think of £20 per point and closing £10 per point).  

With this DJIA trade I took some profit at 25,500 (closed 50% of my position) and left the rest to run. 

This was the result: 

A chart showing the full DJIA 1000 point swing trade.

The second profit target was up at 1000 points. 

We like 1000 point swing trades.

Summary
  1. Look at a 14 period RSI on a nigher time frame like the hourly chart. Look for for divergence. 
  2. Look for a gap in the opposite direction.
  3. Fine tune the entry on the 5-minute time frame
  4. Scale out and leave 50% to allow you to trade the swing.  

Breakout swing trades

So here there is some overlap with our Breakout Strategy Guide

That’s why the focus here is going to be on trading an appropriate time frame, using the correct risk and setting the correct stops and targets. 

Managing risk

Let’s start off by making sure we manage our risk appropriately. Some traders will rigidly stick to a fixed trade size as their guide for their position sizing. What I mean by this is some traders will always trades 1 contract or £10 per point (if Spread Betting) no matter that market, time frame or stop they need. 

Madness. 

Here’s the way to work it out to enable you to trade with consistent risk. 

First define what stop distance you need. Then divide the amount you want to risk by that stop distance. It’s simple and needs to become second nature for your trading. 

For example if your maximum risk is £500 per trade, you need to be using different trade sizes depending on what stop you need. 

A chart showing the differences between different stop loss locations on leverage.

Take the two potential stop locations. There would be a big difference between the trade size used depending on which one you wanted to use! The bigger stop is nearly 4 times the size and therefore a trade with this stop requires a trade size 1/4 of the trade size used for a trade of the same risk using the smaller stop.

Trading the right time frame

As swing trading suggests, we are intending and expecting to be in the market for a longer period of time. We are not expecting to be in and out of a trade within the same day. Therefore we want to be looking for patterns in the market on the right time frames as this will allow us to take advantage of longer-term market moves. 

Here are two swing trades we took on the SPX. This is on a daily time frames. Both were long trades (orange for entry, red for initial stop and green for profit target). The first trade took 28 days and the second 15 days to hit the profit target. The entries, stops and limits were placed appropriately for the market patterns of the daily time frame. 

A chart showing two large swing trades on the SPX.

This brings challenges we need to be prepared for. The first one is having the mental skills to be able to run a trade for this length of time. Most traders struggle to run trades for this long. Especially if they are winning trades. You may have heard that traders ‘run losses and cut winners’. You may have experienced yourself behaving this way yourself. This is because of something called ‘loss aversion’. It means there can be a constant temptation to take profit early on trades. 

These types of swing trades will test your ability to run a trades like few other trades can. Here are some tips to run winning swing trades: 

1) Don't check your positions constantly

If you constantly keep looking at your open profitable positions, the more tempting it becomes to close your positions and snatch profit. This can be compounded if you haven’t had much profit in a while or had have some losing trades. 

The solution here is to try and check your positions inline with how often you need to make decisions. Here that would be when you need to move your stop loss to reduce risk / lock-in profit (if you follow our methoodlogy). 

2) Consider seperate trading accounts

Some professional traders help manage the above by having separate trading accounts. They will have one trading account for their day-trading and one for their swing trading. If you’re looking for an alternative trading account, we have some suggestions on this page

3) Set your expectations before you trade

If you try to accept you are likely to be in a trade for days and possibly weeks, then you are more likely to accept the trade and how you need to manage it before the trade begins. The general rules is that the more thinking and and planning you do, the better. 

How to avoid losing swing trades

Naturally we would prefer to have a trade that is in a winning position from the off. However, there are times when our trades will be in a losing position before they become winners. 

Now with longer-term swing trades we could be in a losing position for days. We need to make sure that we keep perspective of the time we are in the trade and also the pattern / strategy that we are trading. 

I’ve worked with multiple traders who would be able to pick out great swing trading opportunities, but they would kill them if they went to a losing position for a couple of days.

This cost them thousands and my goal was to help them run their trades. 

A variation on this is when a losing trade goes back to break even. This often causes traders to close the trade. Another costly trading error. 

Other swing trading tips

Consider the instrument you are trading

What personality does it have? If you are trading an index, then you should know that index markets go up more than they go down. Does that mean you should only trade long? Or have more ambitious profit targets when trading long?

Is the market sideways or trending?

If the market is trending then breakout swing trades are likely to be the most suitable. If the market is sideways then reversal swing trades at the extremes of the range are likely to be the most suitable. 

Swing trading indicators

Indicators are an obsession for a lot of traders. That is usually because they are searching for a magic combination that will make trading easy and stop them from taking losing trades. 

We prefer to work primarily from price action – after all, nearly every indicator takes it data from the open, high, low and close (OHLC) of the price action. 

As above, the Relative Strength Index is an indicator we like to keep an eye on when looking at reversal swing trades. I’ll talk you through a few others that may be of use. 

RSI for swing trading

Let’s just ave a quick refresh of the RSI we want to use and how we want to use it. 

We take a standard 14 period RSI and looks for divergence when looking for potential major reversal points. 

Divergence here where the market is making lower-lows whilst the RSI is making higher-lows (the opposite is the case when looking for a short trade). 

If this occurs then we have a strong indication momentum is coming out of the market and that we will soon have a reversal opportunity to trade. 

A chart showing a market making-lower lows whilst the RSI makes higher-lows.

Moving averages for swing trading

We use 10, 20 and 59 exponential moving averages for every instrument on every time frame. We have done so for the last 10 years. The reason is we use these is because we have back-tested thousands of hours of market data with our strategies and they are the best for us. We find the market will often bounce off these moving averages which allows us to set and trail stop losses below them. 

The timings of the moving average crosses also support some of our trading decisions. 

MACD indicator for swing trading

The MACD can be used for different purposes. For the purposes of swing trading we want to use it as a momentum indicator. When the market is gaining momentum, sustaining momentum and losing momentum. 

Our MACD is setup around our moving averages. Our settings are 10, 20 and 10. 

What we are looking for, and let us use the move on the SPX we captured as an example once more, is for the MACD to start to accelerate towards the centre and move apart. This shows divergence i.e. the moving averages are moving farther apart from one another. This happens because there is greater directional momentum and the shorter-term moving average, the 10 EMA, is reacting more quickly than the 20 EMA, the longer-term moving average. 

Practically, this gives us greater confidence that the move will be sustained and thus there will be a swing we can ride on the back of. 

A chart showing the MACD and its uses for swing trading.

Bollinger bands for swing trading

Bollinger bands can be used to help indicate when a swing trade is ending. 

A 20 period with two standard deviations will provide the trade with enough ‘room to breathe’ – after all, trending markets do not just go straight up or down. 

If you are trading a long position look for the band to be broken at the bottom to indicate the trend has ended. 

If you are trading a short position look for the band to be broken at the top to indicate the trend has ended. 

The bottom (again, if long), is also a good place to consider trailing your stop loss. That ensures profit it ‘locked-in’ but at the same time is giving the trade room to breathe again. 

A chart showing how Bollinger bands can be used for swing trading.

Swing trading signals

One of the best ways to learn swing trading is to receive swing trading signals. We send out all out live trades to our Telegram channel. The purpose of this is to show people what our trades look like BEFORE the move has happened. This is the best way to learn. 

Let me show you an example: 

A screen shot of a trade swing trade signal sent by us.

Does that trade look familiar? It should, because it is one of the SPX trades we demonstrated in our swing trading video. The one where we added to an existing position and rode a huge move to the upside. 

That is how we sent the trade out.  The information box with the entry, stop and limit price, as well as a chart showing what the market looks like at the time we place our order. 

This allows our members to ‘earn and learn’ from successful trades. These are not just swing trading signals, the charts and the live room support explain why we get into the trade, not just the entries and exits. The reason we support our swing trading signals with explanations of the underlying strategies is that this is essential for a trader’s confidence. 

If you just followed a swing trading signal without understanding the strategy there is a good chance you would bail out of the trade if it moved against you. An understanding of the strategies helps to maintain discipline. 

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Conclusion

Swing trades should be in any trader’s set of strategies. They are one of the most effective ways to capture big market moves and get in to the market for longer periods of times. 

Remember:

  1. Are reversal or trending swings the most suitable? 
  2. Do you have the psychological skills to manage swing trades? 
  3. Can you avoid losing trades through being patient? 
If you can answer the above questions in the right way, you will be on your way to profitable swing trading strategies. 
Want to find out more?

If you’re interested in seeing these trades taken live then our live trade room page has more information.

Contact us on the following to find out how we can help you reach your trading goals. We’re even available for a quick chat. We’re not salesman who hide behind a website and emails, we’re traders here to help.

Contact us on EmailWhatsApp or Telegram

Summary
Our swing trading strategy will make you consistent profits
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Our swing trading strategy will make you consistent profits
Description
We've been trading swing trade for years. We have refined a strategy that generates us consistent profits and is responsible for some of our biggest ever trades.
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Trade Room Plus
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