Weekly Insights: The Basic Principles of Swing Trading

The Basic Principles of Swing Trading


“The trend is your friend” is a tried-and-true market adage that is indeed one of the most valuable futures trading tenets. However, history shows that most markets tend to move in a non-trending, or “sideways” fashion more often than they are in a trending mode. There are several methods by which to trade non-trending markets. One popular method is called “swing trading.”

The basic principle for swing trading is finding a market that is trapped in a sideways trading range (also called a congestion area), or in an up-trending or down-trending channel on the chart. On the chart, the trader must be able to distinguish some clear support and resistance levels that are the boundaries of the congestion area or channel. When a market price approaches the support or resistance area boundary, the trader will establish a position: long, if prices are moving lower and close to the support boundary, and short if prices are moving higher and toward the resistance boundary.

Swing trading techniques can be used in any chart time frame – daily, weekly, monthly, and intra-day. However, the most popular timeframe for swing trading is the daily bar chart.

It is important to note that the strength of the support and resistance at the boundaries is usually determined by the number of times the market has pivoted at the boundaries. The more times a market has reached a support or resistance boundary, and then reversed course, the more powerful that boundary is. Thus, a trader wants to find a well-established channel or trading range for which to attempt to swing trade. An exception to this is a market that has been in a trading range but is bound by one or two powerful spike moves, which also indicate strong support or resistance boundary. In other words, some congestion areas that may offer a good swing-trade opportunity do not require several pivot points. Instead, those one or two spike levels would be determined to be a potentially good pivot area for a market.

The swing trader should still use tight protective stops. A good area to place a protective stop is just outside of a support or resistance boundary that makes up the trading channel or congestion area. For example, if a market in a trading channel is nearing the upper boundary of that channel, the swing trader would establish a short position and would want to place his protective buy stop just above the resistance level that serves as the upper boundary of the trading channel.

Interestingly, if the market keeps moving higher and breaks out above the channel, or congestion area, (stopping the swing trader out of the market) then that would likely be considered an upside “breakout,” which is a favorite trading set-up among many veteran position traders. This set-up would suggest establishing a long position if there was good follow-through buying strength the following session after the upside breakout from the congestion area or channel. The trader establishing the long position would place his protective sell stop just below the former upper boundary of the trading channel or congestion area that was just penetrated on the upside.


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