Swing trading is a longer term trading style that requires patience to hold your trades for several days at a time.
In contrast to swing traders, day traders usually are in and out of the market in one day and trend traders often hold positions for several months. So, in terms of length of holding a trade, swing traders are in between day traders and trend traders.
Okay, so swing trading is defined as a trading method, right?
But what actually is that trading method or what are the characteristics of a swing trading method apart from a trade being opened for more than 2 days, which essentially is the timeframe required to classify a trade as a swing trade?
To answer this question you need to understand these two things:
and price swings
Why? Because this is essentially are the “bread and butter” of swing traders.
We will explain.
What Is A Price Swing?
When you look at a price chart, to a naked, untrained eye, it simply looks like this:
But to a swing trader, this chart tells a lot more things than what the untrained eye can see, things like:
a swing trader can easily identify the past and current trend on the chart and know if the structure of the trend is intact or not or if the trend can potentially change because the structure is broken
a swing trader can easily identify the past price upswings and downswings and these can either form support and resistance levels that price can bounce up or down from sometime in the future.
a swing trader can easily identify the major support and resistance levels
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This EURAUD daily chart below is the same chart as above and shows how the price moved.
And when a swing trader looks at this chart, this is what he sees instantly:
Why Trend Identification Is Important To A Swing Trader
To a swing trader, trading with the trend is really important.
Because in a trend, there are two things that a swing trader looks for:
to see if the trend still intact or is the trend about to change or showing signs of changing
and then once trend identification and analysis is complete, the next thing a swing trader does zoom in closer and look that the up swings and down swings of the trend.
Why look closer at the upswings and downswings of price in a trend?
Answer: that’s where the the best trade entries for swing traders generally are taken because such levels offer really good risk:reward ratio.
What Is A Down Swing and Up Swing Pattern In A Trend?
These two charts below will explain the concept of downswings and upswings in a trend very clearly…
This first chart shows AUDCAD on the daily time frame in a downtrend market.
Next thing you also notice is the price patterns of upswings and downswings as price continues to go lower and lower.
A similar but opposite situation happens in an up trend market as shown by this EURUSD daily chart below:
These upswings and down swings of price are like the waves in a trend:
in an uptrend, the peaks and troughs of these upswings and down swings are increasing.
in a downtrend, they are decreasing.
So in an uptrend market, price makes increasing higher highs and increasing lower lows. So here are some important points for you to remember:
the downswing in an uptrend happens when price makes a higher high (HH) and moves down to a higher higher low (HL).
So that whole distance between the formation of HH and HL is a down swing…it is not just one point.
Similar, in a downtrend or bear market:
the downswing happens when price makes a lower high (LH) and moves down to a higher lower low (HL).
So that whole distance between the formation of LH and LL is a downswing…it is not just one point.
Once you begin to understand these concepts mentioned above, you will see and understand how trends end or start. This is the very important trading concept.
How Do Trends Start/End?
How does a trend start? How does an trend end? What tools or methods would you use for knowing the start and end of trends?
These are questions not only for swing traders but many other forex traders as well.
For many swing traders, price action leaves clues as to when a trend may be starting or ending.
Now you can see how the concept of upswings and downswings that you’ve just read above are going to make sense here when it comes to trend identification.
When using price action only to identify trend start and end, the following two are really important concepts that every forex trader should know like the 10 commandments, except you only have to remember only 2 laws:
An uptrend is said to begin when the Higher High is intersected and price closes above it.
A downtrend begins when the Lower High is formed and the higher low (HL) is intersected.
This chart shows you what we mean:
The chart above is a text book example. (Its perfect in every way, in an ideal situation).
But guess what?
The reality of forex trading is more like this:
As you can see on the chart above, it does look kinda confusing…and to be quite honest, it would be because there are always going to be few false “trend changes” signals before the trend actually changes.
There’s no way you can solve the problem That’s just the way this forex market works.
You just have learn to take it as it comes. As I said, the real market is not a text book example.
One solution is to really spend a lot of time looking at charts and understanding how price moves and price action…it is not a complete solution but it will help you a lot, believe me.
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