Part 15 Technical Analysis – Swings

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Part 15: Technical Analysis – Swings

Swings are extremely important and belong to technical analysis since the beginning of time and all of you, who did the technical analysis before, surely noticed them. Swings are a foundational tool which nevertheless should be known also by the more experienced traders. But what are swings? And how can we use them for trading?

What is a swing

Swing cannot be easily defined using only one word. Swings are price movementscurves or waves made when the short-term trend reverses. When the swings are raising and each swing is above the previous one, we can talk about a rising trend. And vice versa. Swings can be found on all timeframes from M1 up to monthly.

On the picture on the right, I have marked the curves I am talking about. It is a system through which price of all assets from stocks to currency pairs to indexes change. Swings were and always will be here. There will always be someone, who will sell or buy assets and exactly these people make swings possible.

However, to be exact, when talking about swings, we are talking only about the top and bottom curves, not the whole wave. See the following picture.

What are swings good for

Swings are, as I’ve mentioned earlier, a foundational method used to determine a trend. If they rise, ie. swing low and swing high alternate and end always on a higher price, we can say that price is in an uptrend (rising trend).

For downtrend (declining bearish trend) it is the same, just the opposite, curves must fall down. If swings do not clearly rise or fall, we can talk about intermediate stage between trends – stagnation. And therefore, also about (ie. after double peak) trend reversal, or (after a rebound from strong support) about trend continuation.

On the picture above you can see a rising trend – swings rise. When they stop rising and stagnate, trend reversal and decline follows.

Swing summary

I hope I presented the topic clearly. Swings are a simple method to determine trend using rising and falling local maximums and minimums. �� I wish you good luck in determining the trend!

Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

Multiple Time Frames Can Multiply Returns

In order to consistently make money in the markets, traders need to learn how to identify an underlying trend and trade around it accordingly. Common clichés include: “trade with the trend”, “don’t fight the tape” and “the trend is your friend”. But how long does a trend last? When you should you get in or out of a trade? What exactly does it mean to be a short-term trader? Here we dig deeper into trading time frames.

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Key Takeaways

  • A time frame refers to the amount of time that a trend lasts for in a market, which can be identified and used by traders.
  • Primary, or immediate time frames are actionable right now and are of interest to day-traders and high-frequency trading.
  • Other time frames, however, should also be on your radar that can confirm or refute a pattern, or indicate simultaneous or contradictory trends that are taking place.
  • These time frames can range from minutes or hours to days or weeks, or even longer.

Time Frame

Trends can be classified as primary, intermediate and short-term. However, markets exist in several time frames simultaneously. As such, there can be conflicting trends within a particular stock depending on the time frame being considered. It is not out of the ordinary for a stock to be in a primary uptrend while being mired in intermediate and short-term downtrends.

Typically, beginning or novice traders lock in on a specific time frame, ignoring the more powerful primary trend. Alternately, traders may be trading the primary trend but underestimating the importance of refining their entries in an ideal short-term time frame. Read on to learn about which time frame you should track for the best trading outcomes.

What Time Frames Should You be Tracking?

A general rule is that the longer the time frame, the more reliable the signals being given. As you drill down in time frames, the charts become more polluted with false moves and noise. Ideally, traders should use a longer time frame to define the primary trend of whatever they are trading. (For more on this see, Short-, Intermediate- and Long-Term Trends.)

Once the underlying trend is defined, traders can use their preferred time frame to define the intermediate trend and a faster time frame to define the short-term trend. Some examples of putting multiple time frames into use would be:

  • A swing trader, who focuses on daily charts for decisions, could use weekly charts to define the primary trend and 60-minute charts to define the short-term trend.
  • A day trader could trade off of 15-minute charts, use 60-minute charts to define the primary trend and a five-minute chart (or even a tick chart) to define the short-term trend.
  • A long-term position trader could focus on weekly charts while using monthly charts to define the primary trend and daily charts to refine entries and exits.

The selection of what group of time frames to use is unique to each individual trader. Ideally, traders will choose the main time frame they are interested in, and then choose a time frame above and below it to complement the main time frame. As such, they would be using the long-term chart to define the trend, the intermediate-term chart to provide the trading signal and the short-term chart to refine the entry and exit. One note of warning, however, is to not get caught up in the noise of a short-term chart and over analyze a trade. Short-term charts are typically used to confirm or dispel a hypothesis from the primary chart.

Trading Example

Holly Frontier Corp. (NYSE: HFC), formerly Holly Corp., began appearing on some of our stock screens early in 2007 as it approached its 52-week high and was showing relative strength versus other stocks in its sector. As you can see from the chart below, the daily chart was showing a very tight trading range forming above its 20- and 50-day simple moving averages. The Bollinger Bands® were also revealing a sharp contraction due to the decreased volatility and warning of a possible surge on the way. Because the daily chart is the preferred time frame for identifying potential swing trades, the weekly chart would need to be consulted to determine the primary trend and verify its alignment with our hypothesis.

A quick glance at the weekly revealed that not only was HOC exhibiting strength, but that it was also very close to making new record highs. Furthermore, it was showing a possible partial retrace within the established trading range, signaling that a breakout may soon occur.

The projected target for such a breakout was a juicy 20 points. With the two charts in sync, HOC was added to the watch list as a potential trade. A few days later, HOC attempted to break out and, after a volatile week and a half, HOC managed to close over the entire base.

HOC was a very difficult trade to make at the breakout point due to the increased volatility. However, these types of breakouts usually offer a very safe entry on the first pullback following the breakout. When the breakout was confirmed on the weekly chart, the likelihood of a failure on the daily chart would be significantly reduced if a suitable entry could be found. The use of multiple time frames helped identify the exact bottom of the pullback in early April 2007. The chart below shows a hammer candle being formed on the 20-day simple moving average and mid Bollinger Band® support. It also shows HOC approaching the previous breakout point, which usually offers support as well. The entry would have been at the point at which the stock cleared the high of the hammer candle, preferably on an increase in volume.

By drilling down to a lower time frame, it became easier to identify that the pullback was nearing an end and that the potential for a breakout was imminent. Figure 4 shows a 60-minute chart with a clear downtrend channel. Notice how HOC was consistently being pulled down by the 20-period simple moving average. An important note is that most indicators will work across multiple time frames as well. HOC closed over the previous daily high in the first hour of trading on April 4, 2007, signaling the entry. The next 60-minute candle clearly confirmed that the pullback was over, with a strong move on a surge in volume.

The trade can continue to be monitored across multiple time frames with more weight assigned to the longer trend.

Swing Trading

What Is Swing Trading?

Swing trading is a style of trading that attempts to capture gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities. These traders may utilize fundamental analysis in addition to analyzing price trends and patterns.

What is Swing Trading?

Understanding Swing Trading

Typically, swing trading involves holding a position either long or short for more than one trading session, but usually not longer than several weeks or a couple months. This is a general time frame, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades. Swing trades can also occur during a trading session, though this is a fairy rare outcome that is brought about by extremely volatile conditions.

The goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an asset’s price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes.

Successful swing traders are only looking to capture a chunk of the expected price move, and then move on to the next opportunity.

Key Takeaways

  • Swing trading involves taking trades that last a couple of days up to several months in order to profit from an anticipated price move.
  • Swing trading exposes a trader to overnight and weekend risk, where the price could gap and open the following the session at a substantially different price.
  • Swing traders can take profits utilizing an established risk/reward ratio based on a stop loss and profit target, or they can take profits or losses based on a technical indicator or price action movements.

Swing trading is one of the most popular forms of active trading, where traders look for intermediate-term opportunities using various forms of technical analysis. If you’re interested in swing trading, you should be intimately familiar with technical analysis. Investopedia’s Technical Analysis Course provides a comprehensive overview of the subject with over five hours of on-demand video, exercises, and interactive content cover both basic and advanced techniques.

Many swing traders assess trades on a risk/reward basis. By analyzing the chart of an asset they determine where they will enter, where they will place a stop loss, and then anticipate where they can get out with a profit. If they are risking $1 per share on a setup that could reasonably produce a $3 gain, that is a favorable risk/reward. On the other hand, risking $1 to make $1 or only make $0.75 isn’t quite as favorable.

Swing traders primarily use technical analysis, due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. For example, if a swing trader sees a bullish setup in a stock, they may want to verify that the fundamentals of the asset look favorable or are improving also.

Swing traders will often look for opportunities on the daily charts, and may watch 1-hour or 15-minute charts to find precise entry, stop loss, and take profit levels.

Requires less time to trade than day trading

Maximizes short-term profit potential by capturing the bulk of market swings

Traders can rely exclusively on technical analysis, simplifying the trading process

Trade positions are subject to overnight and weekend market risk

Abrupt market reversals can result in substantial losses

Swing traders often miss longer-term trends in favor of short-term market moves

Day Trading vs. Swing Trading

The distinction between swing trading and day trading is, usually, the holding time for positions. Swing trading, often, involves at least an overnight hold, whereas day traders closes out positions before the market closes. To generalize, day trading positions are limited to a single day while swing trading involves holding for several days to weeks.

By holding overnight, the swing trader incurs the unpredictability of overnight risk such as gaps up or down against the position. By taking on the overnight risk, swing trades are usually done with a smaller position size compared to day trading (assuming the two traders have similarly sized accounts). Day traders typically utilize larger position sizes and may use day trading margin of 25%.

Swing traders also have access to margin or leverage of 50%. This means that if the trader is approved for margin trading, they only need to put up $25,000 in capital for a trade with a current value of $50,000, for example.

Swing Trading Tactics

A swing trader tends to look for multi-day chart patterns. Some of the more common patterns involve moving average crossovers, cup-and-handle patterns, head and shoulders patterns, flags, and triangles. Key reversal candlesticks may be used in addition to other indicators to devise a solid trading plan.

Ultimately, each swing trader devises a plan and strategy that gives them an edge over many trades. This involves looking for trade setups that tend to lead to predictable movements in the asset’s price. This isn’t easy, and no strategy or setup works every time. With a favorable risk/reward, winning every time isn’t required. The more favorable the risk/reward of a trading strategy, the fewer times it needs to win in order to produce an overall profit over many trades.

Real World Example of Swing Trade in Apple

The chart above shows a period where Apple (AAPL) had a strong price move higher. This was followed by a small cup and handle pattern which often signals a continuation of the price rise if the stock moves above the high of the handle.

  • the price does rise above the handle, triggering a possible buy near $192.70.
  • One possible place to put a stop loss is below the handle, marked by the rectangle, near $187.50.
  • Based on the entry and stop loss, the estimated risk for the trade is $5.20 per share ($192.70 – $187.50).
  • If looking for a potential reward that is at least twice the risk, any price above $203.10 ($192.70 +(2 *$5.20)) will provide this.

Aside from a risk/reward, the trader could also utilize other exit methods, such as waiting for the price to make a new low. With this method, an exit signal wasn’t given until $216.46, when the price dropped below the prior pullback low. This method would have resulted in a profit of $23.76 per share. Thought of another way – a 12% profit in exchange for less than 3% risk. This swing trade took approximately two months.

Other exit methods could be when the price crosses below a moving average (not shown), or when an indicator such as the stochastic oscillator crosses its signal line.

Swing Trading’s 11 Commandments: Top Strategies for Technical Analysis

My, we sure have come a long way since our first trading lesson!

I’d like to thank you for giving me the opportunity to teach you a bit more about my swing trading methodologies and the technical analysis I use to practice it. After I recap Lessons 1 through 4, I will provide you with a final lesson that should prove to be the most comprehensive and valuable yet — The 11 Commandments Of Swing Trading .

A Look Back at Our Previous Trading Lessons
In my first lesson —Start Swing Trading Today — I introduced you to the relationship between swing trading and technical analysis. The better you become at technical analysis, I noted, the more efficient and profitable your swing trades will be.

I showed you how important it is to recognize the trend in the time frame you are trading. I used the example of fictitious XYZ Corp. (XYZ) to show you what a great swing trading set-up looks like and how you could reap profits of 50% or more in just a few trading days/weeks.

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