Comprehensive analysis of swing trading
Many friends often ask me a question: What kind of trading is the best to do? Or what kind of trading is the easiest to make money? I basically won't give a definite answer, because no matter what type of trading, if done well, it can make money.
But in my heart, I still prefer swing trading because it is relatively easier to execute. It neutralizes some of the strengths and weaknesses of trend trading and range-bound trading, without overly challenging human nature. It is relatively more suitable for us ordinary traders, including my own trading strategy, which is also based on swing trading.
So today I decided to write this article to clarify all aspects of swing trading, including what swing trading is, what its advantages are, and to directly share a technical method for swing trading.
The content includes theory and technique, with the purpose of helping everyone to understand swing trading more deeply and comprehensively, and to add bricks and tiles to their own technical strategies.
1. What is swing trading?
A swing is a segment within a wave, and trading is about a segment of the wave trend.
The basic definition of a trend comes from Dow Theory, which states that trends operate in the form of waves. Many continuous waves that keep setting new highs form a bullish trend, while many continuous waves that keep setting new lows form a bearish trend.
So-called swing trading is that we can do well in some of these waves to make a profit.
Therefore, trend trading and swing trading actually have a parent-child relationship, with swing trading being a segment within the trend.
The chart is a 1-hour candlestick chart of spot gold.Five red arrows represent a complete bullish trend. If one is trading with a trend-following strategy, they should look for opportunities to enter near the low point of 2315 and hold until the end, not closing the position during two deep retracements.
The space between the two blue rectangles is the phase for swing trading participation. One should look for opportunities to enter on retracements and take profits after a rise, then wait for the next swing trading opportunity.
The biggest differences between the two are:
(1) Exit strategy.
The most significant feature of swing trading is the proactive profit-taking. Once the holding profit reaches the target position, one exits the position. However, trend trading does not take profits proactively; it can only passively follow the trend until the market shows a signal that the trend has ended, and then the order is passively closed for profit.
Swing trading takes profits proactively, holding positions for a shorter time, while trend trading takes profits passively, holding positions for a longer time. From a psychological standpoint, reducing the holding time is beneficial to trading mentality.
However, the profit space from proactive profit-taking in swing trading will inevitably be smaller than that from passive profit-taking in trend trading.
(2) Money management.
Trend trading typically uses a fixed position size for opening positions, which allows for larger profits when the market is running and smaller stop-loss orders, resulting in less loss.
On the other hand, swing trading employs a fixed stop-loss amount for money management rules, as each profit space is not very large. It relies on the success rate and the combination of profit-to-loss ratio for profit.The operation of a fixed stop-loss amount ensures that each time the market moves to a profit-loss ratio, both the profit and loss amounts are fixed, making the realized profits easier to control.
2. What are the advantages of swing trading?
(1) If you find it difficult to accept consecutive stop losses and drawdowns in trend trading, swing trading may be more suitable for you.
We all know that trend trading is good because it can be profitable for a long time without making a move, and a single profit can be very comfortable, which is why many people advocate for trend trading.
However, only those of us who have been trading for years truly understand that the biggest characteristic of trend trading is the high frequency of consecutive losses. Once we encounter a choppy market, trend trading will continue to be wrong and lose money. We must watch our capital gradually decrease, not knowing when the dawn will come, which is extremely uncomfortable.
At the beginning of trading, we are all full of confidence, thinking we can be heroes and withstand long periods of drawdowns to wait for that big profit. But how many people lose their patience and confidence in the face of repeated losses, becoming the bears who cut their losses and run? Let's not talk about it, as it's all tears when we do.
There is also a type of drawdown that occurs within the trend, as shown in the picture below.
The image is a 1-hour chart of spot gold.
The uptrend wave covered a space of 70 dollars, while the correction wave reached a space of 44 dollars.
Imagine if we traded one contract here, the profit at the high point could reach 7,000 dollars, but at the low point of the correction, we would give back 4,400 dollars, leaving only 2,600 dollars in profit, with most of the profit given back. At this point, most people's operation would be to close the position quickly to secure the profit, but this would miss out on the larger profits that follow.The market later rallied by another $110, and if one did not close the position at the peak, there would be a profit of $13,600. At this point, one would regret and stomp their feet in frustration.
Moreover, when not holding onto profits during major trends and continuing to suffer losses during volatile markets, the losses outweigh the gains, and the ultimate outcome of trend trading is failure.
Therefore, extreme drawdowns and profit givings are very common in trend trading, each time being a huge test of one's mentality, while swing trading is relatively much more moderate.
(2) Trend trading involves holding positions for too long and has a very low trading frequency, while swing trading is relatively moderate and more acceptable. This is because trend trading is a passive profit-taking strategy, which means the holding period is long and the frequency is low.
You have just confidently formulated your trading strategy and started to hold positions, but after waiting for two days, the market does not move. At this time, you might start to have doubts: has the trend stopped or is it about to reverse? Should you close the position?
As the timeline stretches longer and longer, the psychological defenses will gradually be broken down. In fact, compared to short-term trading, the probability of profiting from medium to long-term trades is higher, but most people lose because of the word "wait." The longer the time, the worse the trading confidence becomes.
Just like how I go to the gym almost every day and have been doing so for many years, I see new faces every day, but very few people stick with it. Persistence is truly a difficult thing.
So time consumes passion, and the market's grinding nature also consumes belief. The longer the holding period, the more it tests one's mentality, and the harder it is to do well.
(3) Swing trading is more flexible and can also make profits in a wide-range volatile market trend.Each band only takes a segment of space at a time, and the market can be closed after a surge, sometimes when the market is in a wide range of oscillations, it can also make a profit, and in such a market, there is no profit in trend trading, and it may even lose money.
The figure is a schematic diagram of gold at the 1-hour level.
The three blue circles in the figure are trading opportunities where band trading can make a profit, and there are 15 trading days in the figure, with a time cycle of three weeks.
If you switch to trend trading, there is no profit in these three weeks because there is no trend, and you may even lose money.
(4) In fact, doing a large cycle of bands is equivalent to a small level of trend.
Trends are divided into different levels, and everyone generally uses different cycles of K lines to define trends at different levels, such as hourly levels, 5-minute levels, daily levels, and the trends of large cycle K lines are composed of trends of small cycle K lines.
An upward band trading at the hourly level may be a complete upward trend at the 5-minute level.
The figure is a K line chart of spot gold, with the left side at the 1-hour level and the right side at the 5-minute level.
The three waves of a band trade at the 1-hour level on the left side are a complete upward trend at the 5-minute level.
So doing a 1-hour band is equivalent to doing a 5-minute or 15-minute trend. Trends and bands are interdependent, and we can do bands at different levels.(5) The impact of each swing trade on the final outcome is average; missing or making a mistake once or twice will not have a particularly significant effect. The essence of trend trading is to go through a series of small stop losses and then hold onto a large profit, so every order in trend trading is extremely important and must not be missed, because each order could be that big trend, and there must be no mistakes in trading. On the other hand, swing trading has a higher tolerance for errors. Although each profit is not substantial, the impact of a single gain or loss on the overall trading result is not that significant. Even if we make a mistake or miss a trade, we can still continue.
3. Discuss one technical method for swing trading
As mentioned earlier, swings are actually a part of trends, but the way of exiting is different, the profit and loss space pursued is different, the trading frequency is different, the duration of holding positions is different, and the difficulty of executing trades is different. Therefore, the best way to do swing trading is to follow the direction of the trend, which has a higher success rate and better trading results.
There are three possible trends: rising, falling, and consolidating. We also mentioned that swing trading has opportunities for profit in both wide-range consolidations and trends. If we can form a judgment on the trend and exclude a high-probability counter-trend direction, it would be good to do swing trading in the other two directions.
For example, after a significant market drop and a bottoming out, if the bottom indicators are formed, the likelihood of the market rising or consolidating at the bottom is very high. We can temporarily exclude the bearish direction and do bullish swings for a period, only going long and not short.
The chart shows a crude oil candlestick chart, with the left side at a 1-hour level and the right side at a 5-minute level. At the 1-hour level, the market started to decline from $80, falling nearly 800 points to $72 in 4 days. At this point, there is a possibility that the market has bottomed out, and the probability of bottom consolidation and upward correction is higher, while the probability of further decline is lower.At this point, you can use the crossover of two moving averages at the 5-minute level to enter a long position, with the stop loss set at the low point of the pullback. Set a fixed profit-to-loss ratio of more than 3:1 for taking profits. There are 4 profitable signals in the chart, each with a profit of nearly 100 pips (the moving averages in the chart are EMA30 and EMA15).
Let's summarize: This pullback trend from 72 to 75 pulled back by 300 pips. In trend trading, by cutting off the head and tail, capturing 70% of the space is considered a relatively successful trade, which is about 210 pips of profit. In swing trading, taking a profit each time and subtracting the losses from the stop-loss orders can also yield a profit of more than 200 pips. In fact, the overall profit effect of the two is similar, but swing trading is more comfortable and less torturous.
The above pattern can be operated at different candlestick levels.
The following statement is very important:
Trading is not a series of random punches, but rather taking advantage of the enemy's unpreparedness, finding the weak points in the trend to strike, and once successful, quickly disengage and do not linger in the battle, waiting for the next weak point in the trend to appear.
When the market has fallen sharply and is exhausted, the likelihood of further decline decreases, and the possibility of a bullish or consolidating trend increases. This is the weak point of the market, a phase with a high probability advantage.
You must have patience and confidence; the trend will definitely reveal its weak points and will definitely provide opportunities. This is 100% certain. As long as you have patience and confidence, this is also our belief in trading.
In fact, the "weak points" that each trader masters are different. After observing the market for a long time, I believe everyone will have their own judgment of the market, their own technical standards, which may be a certain pattern of a few moving averages, or a special trend of a certain product, a certain pattern of a break. This pattern does not appear often, but as long as it appears, the market is likely to follow.
This is what you are good at, and this is your probability advantage. At this time, you are strong, and the market is weak, which is a good time for us to make profits.
At this time, we formulate a detailed trading plan, use a reasonable position, and make profits in the advantageous phase.Many people also wonder:
What if, after exiting a swing trade, a large price movement occurs and I don't make any money?
This is a typical approach to swing trading with a "trend mindset," which is a state of wanting both. It's not advisable to be greedy for the ease and stability of swing trading while also coveting the profits of trend trading.
We should consider that we often see opportunities where a large price movement occurs after we close our positions, but we forget about the times when the trend reverses right after we close our positions. If we didn't close those trades, we would have given back our profits, and the money we had in hand would be gone. We can't always focus on what we didn't get and forget the real pain we've experienced.
Therefore, when engaging in swing trading, it's crucial to avoid being overly concerned with gains and losses and to steer clear of perfectionism.
In today's article, I only shared one technical method, and discussed more about trading philosophy, with the intention of sparking ideas and encouraging everyone to combine this technical method with their own skills to create their own advantages.
After all, only when our thinking is clear can our trading be smooth. When facing an opponent, we can attack in any way we choose; the goal is to defeat him. There's no need to be fixated on a particular form; finding the simplest method that suits us best is what matters most.