How to Find Good Swing Trading Set-Ups

swing trading

Swing trading is often the starting point for those who are looking to venture into trading, and perhaps make the move from being an investor to becoming an active trader. The reasons for this are simple; it involves trading on a medium timeframe which means it is possible to do it while you still have a day job, and it can complement other trading styles like day trading, trend trading, or scalping.

According to Investopdia, typical holding time for a swing trader is 1-4 days. In forex, we would typically hold our trade for no more than 5 days in order to eliminate the risk of holding a position while the markets are closed over the weekend. For cryptocurrencies however, which trade 24/7, we can adapt our rules and we no longer need to be so strict about the holding period. In crypto, as long as the conditions for holding the trade are still valid, we should hold on to it.

What is a swing in a market?

The market price of a cryptocurrency can be defined as the equilibrium between supply and demand at any given time. It is the price where a buyer and a seller agree to make a trade. Over time, these equilibrium prices can move in uptrends or downtrends or even sideways in a range.

A typical market pattern is for prices to move from contracting ranges to expanding ranges. The shift between these two is called a “break-out,” and this is where we see strong and quick price movements to a new area on the chart.

One way to look at it is to compare range contraction to a spring that is being compressed. The break-out occurs when all the energy from the spring is released, which may happen either to the upside or the downside. We now have the beginning of a “swing” in the market.

If this break-out is followed by a series of higher tops and higher bottoms in “wave movements,” the market has formed an uptrend. If the inverse is true, we have a downtrend. Each wave is considered its own swing in the market.

As swing traders, our job is to catch the most violent part of this move – the break-out. Some traders choose to hold on to the trade through several swings and thus ride the trend, while others prefer to sell once a pre-determined price target has been reached.

How to spot good potential swings?

For the majority of the time, prices of any tradable instrument move within a certain range. In the stock market, it is often said that the market is ranging as much as 80% of the time.

To scan for potential trading opportunities, one approach is to first look at your charts in one of the higher timeframes, for example the daily or the 4-hour timeframe. Once you spot a promising set-up, switch to a lower timeframe like the 1-hour to look for specific entry opportunities.

Generally speaking, there are three important factors you need to take into consideration when looking for an entry as a swing trader:

  1. Swings should happen in the same general direction as the trend that is playing out on the higher timeframes.
  2. If trading crypto, look for momentum in coins that share similar characteristics as the one you are trading. For example, if you are considering to trade a privacy-oriented coin like Dash, how are other privacy coins like Monero or Zcash doing? In the stock market, look for stocks in the same industry.
  3. Carefully evaluate the trend. Is it getting stronger or weaker? A weakening trend could mean that it is about to change direction, while a strengthening trend could mean the opposite. Is trading volume supporting the trend? Uptrends with gradually increasing volume are considered the most robust.

Timing and win rate

The best instrument to trade is the one that is exhibiting the strongest behavior in its class. So, to use the privacy coins as an example again, pick the one that is trending up in the strongest way among them. This is the coin where you want to place your trade.

In addition to this, don’t forget to adjust and tweak your strategy to the prevailing market conditions. Remember that the win rate of any trading strategy can change dramatically under changing market conditions, and make you go from being a profitable trader to a losing trader.

As swing traders, we need to be aggressive when we spot good opportunities. You cannot afford to pass on good trading opportunities. Make sure that you earn enough on your good trades to make up for the inevitable losses that will come.

Similarly, a swing trader also need to know when to stay away from the market altogether. It is equally important to recognize the conditions you should stay away from, as it is to be aggressive under the right conditions.

Lastly, remember the words of the legendary trader Jesse Livermore: “There is a time to go long, a time to go short, and a time to go fishing.” These are wise words that we all should remind ourselves of from time to time.

Good luck on your swing trading journey.

Featured image from Pixabay.

Author:
Fredrik Vold is an entrepreneur, financial writer, and technical analysis enthusiast. He has been working and traveling in Asia for several years, and is currently based out of Beijing, China. He closely follows stocks, forex and cryptocurrencies, and is always looking for the next great alternative investment opportunity.