Swing Trading - Join the Swingers!

Join the Swingers!

If you have not tried it before, now may be time......

Swing Trading is rife and sits firmly between long-term trading and day trading.
It is probably the style of trading that has grown the most in the last 5 years and current market volatility provides the ideal climate to put your swing strategies into action.

Swing trading essentially captures the relatively short-term trend oscillations which occur in most markets and in particular, the equity markets. The key to successful swing trading, is picking the right instruments to trade, as some equities ‘swing' better than others. It is usually the large cap stocks which are the best, as you can benefit from both volatility and liquidity.
So, as a swing trader you will be attempting to capture the up swing by going long and then reversing the position on a down swing. The difficulty is not really in capturing the swing itself, but moreso the instruments or stocks that are likely to oscillate, as oppose to trend.

For longer term trend trading commodites and forex are often the best to trade because their movement is reflected by macro economic events which create a basis change over a period of time resulting in a prolonged trend in a particluar direction. It does not mean that there are not opportunities to swing trade during a trend as there is nearly always oscillation caused by short-term changes in sentiment or behaviour of the market particpants themselves.
Swing trading during a strong market trend does have its dangers as it is more difficult to spot the ranges and sometimes the product will move in a straight line for extended periods, which will ultimately result in the stopping out of positions too often...a predicament I am sure we have all been in before !

So the swing trader is best positioned when markets are going nowhere and typically may reverse his position every few days or even every couple of weeks. For those wishing to automate their trading, swing trading is the ideal time frame to do this, as slippage has little impact on profitability. Also exit levels, on both the profit side and loss side, are more easily defined.

Indices are a great product to swing trade, as they often move in one direction for a few days and then reverse and move in the opposite direction for a similar period. No better example than the FTSE 100 over the recent 2 months during which the uncertain economic climate has limited any catalyst for definitive direction or trend.

The FTSE 100 Index chart illustrated above shows the daily price action during the run up to the end of 2009. Now all contracts move in a saw tooth pattern, even when they are trending; however there is no better swing trading opportunity than when the market is trading sideways. Your swing point can be defined using a number of technical studies, some of the most common being moving averages, relative strength indicators and stochastics.

Once the sideways channel is in motion then catching the swings is relatively straight forward; however as with longer-term trend trading, spotting that a market is in the particular formation is the difficult thing.

I think a great way to make this identification easier is to trade the swings whether the market is moving sideways , upwards or downwards, but if trending, always trading in the direction of the trend.

Swing traders are not looking for the home run every trade but look to take small bites out of the market, with relatively low risk entry and exit points. They are not concerned with necessarily buying at the very bottom or selling at the very top, but wait for confirmation that the market has reversed before jumping on board the swing.

So entry points can be recognised fairly easily using studies like moving averages, where an upswing maybe in play when the price action moves above the average, and vice versa, a downswing when the price action moves below the average. The real art is placing your stop loss at a right point, when the market defies your technical study and continues to trend out of your trading range.

Swing trading is common amongst day traders and longer-term traders as it offers regular opportunities to close a position and start again; whereas positions held for weeks on end can often result in boredom or ill disciplined trading decisions.

Automated signal generation and execution of swing trades is verging on the norm, as the trade frequency is low enough to reduce the impact of slippage and trading costs on profits, with trade length long enough to catch a mini trend within the range.

I know many a day trader who combines there active intra day scalping, with a slightly less stressful swing trading strategy. The good news is that markets always have and always will oscillate, providing the perfect opportunity to capitalise on the swings that often are the result of sentiment and therefore likely to reverse...

Simon Brown
Managing Director
ProSpreads