Jesse Livermore, one of the greatest traders who ever lived once said that the big money is made in the big swings of the market. In this regard, Livermore successfully applied swing trading strategies that work. This helped him achieve amazing financial results. A simple swing trading strategy is a market strategy where trades are held more than a single day. They are usually held between 3 days and 3 weeks. Here is how to identify the right swing to boost your profit.
Our team at Trading Strategy Guides has already written about other swing trading strategies that work. Read the Harmonic Pattern Trading Strategy - Easy Step By Step Guide or the MACD Trend Following Strategy- Simple to Learn Trading Strategy. These are some of the most popular strategies ever posted at Trading Strategy Guides.
This time around we’re going to outline a simple swing trading strategy. It's similar to what Jesse Livermore used to trade. Let’s review the swing trading strategy Livermore used to help forecast the biggest stock market crash in history. It is the Wall Street crash of 1929, also known as Black Tuesday. Here is another strategy called a weekly trading strategy that will keep you sane.
By the way, after the 1929 stock market crash, Livermore reportedly made $100 million, which if it's adjusted to inflation is estimated to be about $1.39 billion today.
Quite a lot of money, wouldn’t you say so?
Get Started With Our Simple Swing Trading Strategy
If you were to take a swing trading course right now, I believe the current market conditions would allow any trader to use the proper trading technique to achieve solid results. There are a few things that I think we should consider before getting started.
One of those is to determine if we should trade a countertrend system or a trending stock setup. Either one can work, but it is up to you to determine which one you want to use. I recommend using paper trading on a stock swing the next time you see one develop.
This article is going to go in-depth about a key swing trading technique on daily charts. While this may be considered advanced swing trading, this strategy is suitable for all investors. It is perfect for home study. We will tell you how to do proper technical analysis and show you when to enter the trade and when to exit the trade. We will do this by teaching you how to set the right profit target.
It is important to make sure you have a fully developed training plan before starting to trade any swing trading system. This will help you prepare to become more successful and join the ranks of professional day traders. It is our goal to give you the trading opportunities, as well as help you in every way that we can to become the best swing traders around. You can also learn the way bankers trade in the forex market.
What is Swing Trading?
Swing trading strategies are pretty simple. Using an intermediate time frame (usually a few days to a few weeks), swing traders will identify market trends and open positions. The name swing trading comes from the fact that we are looking for conditions where prices are likely to swing either upwards or downwards.
Swing traders can use a wide array of technical indicators. What makes swing trading unique is that it blends several components of day trading, with the speed of position trading. Swing trading indicators are primarily used to find trends that play out between 3 and 15 trading periods. After we analyze these periods, we will be able to determine whether instances of resistance or support have occurred.
The next step is to identify the bearish or bullish trend and look for reversals. Reversals are often referred to as pullbacks or countertrends. Once the countertrend becomes clear, we can pick our entry point.
The goal is to enter into a position where the countertrend will quickly reverse and prices will swing. This is exactly what enabled Jesse Livermore to earn most of his fortune.
Before diving into some of the key rules that make a swing trading strategy work, let’s first examine the advantages of using a simple swing trading strategy. You can also read about budgeting in Forex for better trading.
What Are the Advantages of a Simple Swing Trading Strategy?
The main advantage of swing trading is that it offers great risk to reward trading opportunities. In other words, you’re going to risk a smaller amount of your account balance for a potentially much bigger profit, compared to your risk.
The second benefit of using swing trading strategies that work is that they eliminate a lot of intraday noise. Now you'll be trading like the smart money does, which is in the big swing waves. Also, read our ultimate guide on the Ichimoku Cloud.
The third benefit of swing trading relies on the use of technical indicators. Using technical indicators can reduce the risks of speculative trading and help you to make clear decisions. While some swing traders pay attention to fundamental indicators as well, they are not needed for our simple strategies.
The last benefit of using a simple swing trading strategy is that you won't need to be glued to the screen for the whole day like with day trading strategies. A swing trading plan will work in all markets starting from stocks, commodities, Forex currencies, and much more.
Like any trading strategy, swing trading also has a few risks. Because swing trading strategies take several days or even weeks to play out, you face the risks of “gaps” in trading overnight or over the weekend.
Another risk of swing trading is that sudden reversals can create losing positions. Because you are not trading all throughout the day, it can be easy to be caught off guard if price trends do not play out as planned. To decrease the risk of this happening, we recommend issuing stop orders with every new position. Stop orders can help you “lock in” your gains and can also help you cut your losses.
Before we get started, let’s look at what Swing Trading indicator you need.
The ONLY indicator you really need:
Bollinger Bands Indicator: This is a technical indicator developed by John Bollinger. Bollinger Bands are designed to spot overbought and oversold territory in the markets. They also gauge the market volatility.
Our swing trading indicator makes it easy to manage the risks of trading and also make use of price changes. Using a candlestick trading chart can also be helpful. These charts provide more information than a simple price chart and also make it easier to determine if a sustained reversal will occur.
Many swing traders also keep a close watch out for multi-day chart patterns.
- Head Shoulders Patterns
- Flag Patterns
- Cup and Handle Patterns
- Moving Average Crossovers (also consider the Ichimoku Cloud)
- Triangle Trading Patterns
When there are higher low points along with stable high points, this suggests to traders that it is undergoing a period of consolidation. Consolidation usually takes place before a major price swing (which in this case, would be negative). Learning about triangle trading and other geometric trading strategies will make you a much better swing trader.
This swing trading indicator is composed of 3 moving averages:
- The central moving average, which is a simple moving average.
- And then on both sides of these simple moving averages are plotted two other moving averages at a distance of 2 standard deviations away from the central moving average.
The figure above should give you a good representation of what Bollinger Bands look like. Most trading platforms come with this indicator in their default list of indicators.
If you’re interested in learning more about how one can profit from this amazing indicator - Bollinger Bands – look no further than our Bollinger Bands Bounce Trading Strategy.
The preferred setting for the swing trading indicator is the default settings because it makes our signals more meaningful. We reached this conclusion after testing the strategy based on several inputs.
Now, let’s move forward to the most important part of this article, the trading rules of the swing trading strategy that works.
Before we go any further, we always recommend writing down the trading rules on a piece of paper. This exercise will step up your learning curve and you’ll become a swing trader expert in no time.
Let’s get started…
Swing Trading Strategy That Works
(Trading Rules – Sell Trade)
This strategy is really only made of two elements. The first element of any swing strategy that works is an entry filter. For our entry filter, we’re going to use one of our favorite swing trading indicators aka the Bollinger Bands. The second element is a price action based method.
Step #1: Wait for the price to touch the upper Bollinger Band.
The first element we want to see for our simple trading strategy is that we need to see the stock price moving into overbought territory. Any swing trading strategy that works should have this element incorporated.
Note* The preferred time frame for this simple swing trading strategy is the 4h time frame. This strategy can also be used on a daily and weekly time frame as well.
Step #2: Wait for the price to Break below the Middle Bollinger Bands.
After we have touched the upper Bollinger Band, we want to see confirmation that we are in overbought territory and the market is about to reverse. The logical filter, in this case, is to look after a break below the middle Bollinger Band.
The break below the middle Bollinger Bands is a clear signal of the shift in market sentiment.
We at Trading Strategy Guides don’t trade breakouts without determining whether or not there are real buyers/sellers (in our case, sellers) behind the breakout. This brings us to the next step of our simple swing trading strategy.
Step #3: Swing Trading Indicator: The Breakout Candle needs to be a Big Bold candle that closes near the Low Range of the Candlestick. → Sell at the Close of the Breakout Candle.
So far our favorite swing trading indicator has correctly predicted this sell-off, but we’re going to use a very simple candlestick based method for our entry trigger. For entry, we want to see a big bold bearish candle that breaks below the middle Bollinger Band.
The second element of this candlestick based method is that we need the breakout candle to close near the low range of the candlestick. This is indicative of strong sellers, which really want to drive this currency pair much lower.
Every swing strategy that works needs to have quite simple entry filters.
Now, we still need to define where to place our protective stop loss and where to take profits, which brings us to the next step of our simple swing trading strategy.
Step #4: We hide our Protective Stop Loss above the Breakout Candle.
The breakout candle has a lot of significance because we’ve used it in our candlestick based entry method. We assumed that this candle shows the presence of real sellers in the market. If the high of this candle were to be broken, it’s clear enough that this is simply a fake breakout as there are no real sellers.
It’s nothing complicated about it, right?
If you want to learn more about this breakout technique and how to manage breakout trades, please read our Breakout Trading Strategy Used by Professional Traders article.
The next part of our simple swing trading strategy is the exit strategy which is based on our favorite swing trading indicator.
Step #5: Take Profit once we break and close back above the middle Bollinger Bands.
In this particular case, we’re looking at a short trading example. So, if the price breaks back above the middle Bollinger Banks it’s time to get worried and take our profits as it can signal a reversal.
The reason why we take profit here is quite easy to understand. We want to book the profits at the early sign the market is ready to roll over.
Note* The above was an example of a SELL trade. Use the same rules but in reverse for a BUY trade. In the figure below, you can see an actual BUY trade example, using our simple swing trading strategy.
You can notice that this trade is still running as we have yet to break and close below the middle Bollinger Bands. This just proves that the higher the time frame the more powerful our simple swing trading strategy is.
Simple Swing Trading Strategy FAQ
What is the difference between swing trading and day trading?
The main difference between day trading vs swing trading is the time frame on which the trade makes its trading decisions and the length of the trade. By comparison, day trading works on short-term time frames and positions are closed by the end of the day whereas swing trading works on medium-term time frames.
How to learn swing trading?
To master the art of swing trading it simply comes down to following these 5 time-tested trading principles:
- Trends depend on their time frame.
- Buy the first pullback from a new high and sell the first pullback from a new low.
- Short rallies, not selloffs.
- The best trades show major convergence.
- Bulls live above the 200-day moving average while bears live below it.
This set of swing trading rules were first adopted and developed by the author of “The Master Swing Trader,” Alan Farley.
What is a swing trading strategy for a stock market crash?
The Double Death Cross strategy is the best swing trading strategy you can use during a stock market crash. This is not a matter of “Will the stock market crash again?” but it’s really only a question of when is the stock market going to crash again.
What is the best swing trading strategy for stocks?
Follow these 4 simple steps to start swing trading stocks:
- Find stocks that are ready to make a big move soon
- Enter a position
- Wait for a swing wave to develop in the direction of the primary trend
- Scale-out of your stock in 3 to 10 days to cash out profits
What is swing trading strategies for beginners?
The basic principles for swing trading that every beginner should adhere to is to only buy uptrends and only sell downtrends. But in order to take advantage of the ebbs and flows of the market you need to learn how to identify the right swing high and low. Here is a quick trading guide to spotting correctly swing highs and swing lows in any market.
Some complex strategies can be too overwhelming and confusing. Using a simple swing strategy can be all it takes to succeed in this business. Albert Einstein, the greatest scientist of all time once said that "everything should be made as simple as possible, but not simpler." You can also read how to make money trading.
A swing trading strategy should be made of a swing trading indicator that can help you analyze the trend structure, and secondly a price entry method that looks at the price action which is the ultimate trading indicator.
We understand that there are different trading styles and if swing trading is not your thing you can try our Simple Scalping Strategy: The Best Scalping System which attracted a lot of interest from our community.
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