Because trading is primarily based on tactics, many methods have been developed by experts to optimize investors’ chances of winning. Swing trading is one of the trading techniques that have existed for a very long time. What exactly is it about? And how to apply it? The answers…
Swing trading principle
As its name suggests, the swing trading method consists in trading following the market’s “swings”, i.e., its ups and downs. This stock market investment technique has been used since the 19th century and is particularly applicable in very short trading cycles. It is particularly appreciated by day-traders and private traders, but its speed does not really suit professionals, whose negotiations are often very bulky. Generally speaking, swing trading consists in following the movements of waves on the stock market. This involves trading in the direction of the current, which can be an increase, a decrease or a stagnation. Depending on the trend, the trader will then have the choice between a sale or a purchase. The decision is made quickly, just in time.
In practice: 3 steps
Like any other trading method, the swing trading technique requires a few points to follow to be successful:
Step 1: Determine the trend with Charles Dow’s theory
Dow’s theory is the very basis of swing trading, making it easy to find the market trend. Its principle is simple: it is necessary to refer to the high and low points of the price evolution curve, and if the peaks and valleys are higher and higher, the trend is upward, otherwise, it is downward. It is thus sufficient to establish a curve, using one of the analysis tools offered in trading.
Step 2: Study the impulses and corrections
Apart from a simple downward or upward trend, there are also impulses and corrections, which need to be considered. Impulses are when the curve shows a high peak, but a low trough and the movements follow the direction of the price evolution. Corrections, on the other hand, go in the opposite direction and are often associated with position sales by investors. Most of the time, buying after the corrections is a win-win situation as prices fall before an upward trend resumes.
Step 3: Apply good money management
And finally, the last step is to clearly define your profit objectives and limit the risk of loss. As a general rule, the risk should not exceed 2% per trade. Caution should always be exercised, so swing trading will be easier to use on CFDs than on a currency, for example. Using this technique on binary options once again requires mastery and a good knowledge of the assets traded. We remind you that short-term trading and trading in highly volatile products can generate large risks and losses. Before you start with these techniques, don’t forget to do the preliminary market analyses.