What is swing trading? Let's examine a trading record together.

The chart shows an hourly candlestick chart of the Euro to US Dollar exchange rate, employing the method of swing trading.

The trading period spans 6 months, with a total of 21 trades conducted, 13 of which were profitable, and 8 were stopped out. The initial capital was 10,000, with a profit amount of 1,796, resulting in a profit ratio of 17%.

This is just the profit data for one trading instrument. Swing trading typically involves multiple instruments to maintain a balance between risk and profit. I will elaborate on the practical methods of swing trading in my upcoming articles.

I have been doing swing trading for seven or eight years, and today I will not hold back. I will share all my understanding and experience with you, explaining the characteristics of swing trading and the essence of its practical application.

The entire article is quite lengthy, packed with valuable information. I suggest you bookmark it for reading to avoid losing it. If you find it rewarding, you can give me a thumbs up at the bottom of the article.

1. What is swing trading? What are its characteristics?

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Swing trading is considered a medium-term trading strategy that captures a segment of profit within a fluctuating market trend. The typical holding period is moderate, not as thrilling as short-term trading, nor as grueling as long-term trading. It is a more moderate trading model that aligns well with our real human psychological tendencies.

I have been engaged in swing trading for seven or eight years and have studied the characteristics of this type of trading quite thoroughly. I am happy to share them with you, using the initial case as an example for explanation.

(Remark: No matter what type of trading you engage in, it is essential to study it thoroughly. Knowing both yourself and the market is the key to success in every battle.)Feature 1: Swing trading aims to capture a segment of profit within the market trend and actively takes profits.

Swing trading mostly adopts a fixed profit-to-loss ratio trading model. In this case, the trading profit-to-loss ratio is fixed at 2:1, with all profitable order amounts around 200, and all losing order amounts around 100.

For the EUR/USD hourly swing, during significant market movements, profits can be around 100 pips, and during smaller market movements, profits can range from 30 to 40 pips.

Once an order is closed, the process restarts, waiting for the next trading signal to appear.

Feature 2: Typically uses a fixed stop-loss amount for money management rules.

The money management rule demonstrated in the chart uses a fixed single stop-loss of 1% as the standard.

The initial capital is 10,000 units of currency, and the amount for a single stop-loss is 100 units. The position size for opening a trade is calculated based on the stop-loss space. The calculation formula is: Stop-loss amount / Stop-loss space = Position size.

As can be seen in the chart, when the stop-loss space is small, the position is heavy; the maximum position opened in the chart reaches 0.9 lots, 0.8 lots, with these orders having a stop-loss space of only about 10 pips. When the stop-loss space is large, the position is lighter; the minimum position in the chart goes down to 0.11 lots, with these orders having a stop-loss space of 80-90 pips.

Feature 3: The holding period is neither too long nor too short, fitting human nature.

The chart shows hourly swing trading, with a holding period that is quite moderate.When the market moves relatively quickly, positions can be closed on the same day. In the trading records, there are 9 transactions that were closed on the day they were opened. Most of the other orders were held for 1-2 days before being closed.

Of course, there are special cases, such as the short position on May 5th, which was held until May 19th before a stop loss was triggered. This kind of situation is relatively rare.

The holding period is moderate, which prevents us from trading too frequently within a single day and also prevents us from losing our ability to execute while waiting. It is more in line with human nature and helps in the execution of our overall trading strategy.

Feature 4: The distribution of trading outcomes is relatively even.

From the trading records, we can see that the distribution of trading outcomes is relatively even, and there are not many instances of consecutive stop losses, so the logic of swing trading is still conducive to execution.

Feature 5: Both profits and losses are not significant, which also reduces psychological stimulation.

In the example mentioned above, the risks are quantifiable and controllable. Each stop loss is 100, and even if there are 10 consecutive losses, the total loss would only be 1000.

For us traders, this level of loss is barely a drop in the ocean, and it allows us to trade with more confidence.

Of course, the corresponding profits are not particularly high either. Positions are closed when the profit target is reached. However, small gains add up over time, and steady progress can lead to a considerable profit over the course of a year. The key is to maintain a stable mindset in such circumstances, which is essential to truly make money.

Feature 6: Swing trading is relatively simple to execute.One of the best aspects of swing trading is that the stop-loss and take-profit levels are clearly defined. Once the order is placed, as long as you set the stop-loss and take-profit orders, you can let the market run on its own, and there's generally no need to constantly monitor the open orders, which is very energy-efficient.

Swing trading is very suitable for part-time traders, especially for swing trades above the 1-hour timeframe. As mentioned earlier, with a trading method that involves 21 trades on one instrument over six months, at an average frequency of once a week, it does not affect work and life at all.

After discussing the characteristics of swing trading, I will now explain the specific practical approach, which you can continue to read about below.

2. Specific Practical Methods for Swing Trading

I will still use the initial trading record as a case study to explain this practical approach to swing trading. The indicators used in this case include two moving averages with parameters EMA60 and EMA30, as well as trend lines and reversal patterns in candlestick formations.

1: The requirement is for the two moving averages to cross and the trend line to be broken to determine the direction. A golden cross of the moving averages + a breakout above the descending trend line indicates a bullish direction. A death cross of the moving averages + a breakout below the ascending trend line indicates a bearish trend.

2: After establishing the direction, when the market retraces to the vicinity of the moving averages and forms a reversal candlestick pattern, enter a long position.3: Stop loss is set at the high and low points of the reversal pattern, and take profit is set at twice the stop loss space.

The chart is a schematic diagram of swing trading, showing the 1-hour candlestick of the Euro against the US Dollar.

On the left side of the chart, during a downtrend, the two moving averages diverge downward, connecting a descending trend line from the high point to the low point. After the price breaks through the descending trend line at the end of the trend, the two moving averages form a golden cross, confirming the trend as bullish.

After the market retraces and tests the moving averages, a reversal candlestick pattern is formed. After entering a long position, the order is stopped out.

On the right side of the chart, during an uptrend, the two moving averages continue to diverge upward, connecting an ascending trend line from the low point to the high point. The market falls from a high level and breaks down through the ascending trend line, and at the same time, the two moving averages also form a death cross, confirming the trend as bearish. The market tests the moving averages upward, forming a reversal candlestick pattern, and a short position is entered. The market falls, and the order is taken profit.

Note: Always wait for the market to have been running above or below the moving averages for a certain period of time before drawing the trend line. This way, in a volatile market with frequent moving average crossovers, false signals can be avoided.

Every time the trend is confirmed and the market retraces, and a reversal pattern appears on the moving averages, do it once. Regardless of whether this order is correct or not, if the market continues to consolidate and a pattern appears again, do not enter. This also avoids continuous stop losses when the market retraces and enters a consolidation phase.

This strategy is overall conservative, with various filters applied to both direction confirmation and entry, resulting in a relatively low trading frequency.

You can also set standards based on your specific situation. If you feel that the trading frequency is too low and the waiting time is too long, you can relax the conditions to increase the trading frequency.

Now that we have finished discussing the specific practical methods, let's talk about several practical issues that may be encountered in swing trading.3. Practical Issues Encountered in Swing Trading

Question 1: If the risk-reward ratio is changed to 1:1 or 3:1, is it acceptable?

Let's address this question with data.

If the risk-reward ratio is adjusted to 1:1, the outcome of these 21 trades is 15 correct and 6 incorrect, with a slightly improved success rate, but a decrease in profitability, resulting in a profit rate of 9%.

Since we are filtering for reversals after significant market movements and have selected some volatile market conditions, there is a certain amount of space available after the reversal due to inertia. A 1:1 risk-reward ratio wastes this space, leading to suboptimal results.

If the ratio is changed to 3:1, the result is 10 correct and 11 incorrect, with an even lower success rate, and a profit rate of 19%. This profit rate is essentially close to and not significantly different from the profit rate with a 2:1 risk-reward ratio. Changing to 3:1 is also feasible, with advantages, but they are not substantial.

Becoming more aggressive and changing to a 4:1 ratio, the outcome of the 21 trades is 8 correct and 13 incorrect, with a profit rate also at 19%.

By comparing these data, it is evident that aside from the significant impact of a 1:1 ratio on trading outcomes, the final profit results for other ratios such as 2:1, 3:1, and 4:1 do not differ greatly.

Two points are highlighted here:

1: Such data once again confirms that, with all other conditions remaining constant, the success rate and risk-reward ratio of a trading system are inversely related.2: The final profit results are not significantly different, but with a 4:1 reward-to-risk ratio, the number of consecutive losses in trading is higher. In the example above, there were 11 consecutive trades later on, with 9 losses and 2 wins. With many consecutive losses, the execution difficulty also increases. Therefore, when the profit results are not significantly different, do not set such a high reward-to-risk ratio, which is more conducive to trading.

Note: Due to time constraints, I only counted the results of these 21 trades, and this is just for demonstration purposes. This does not represent that all trading systems are like this. If you want to verify your trading system, you must conduct more data statistics, at least more than 100 times.

Question 2: If a fixed reward-to-risk ratio is not used, are there any other ways to take profit?

Of course, there are, such as taking profit based on support and resistance levels. Long positions can choose the previous high's resistance level to take profit, and short positions can choose the previous low's support level to take profit.

However, judging the support and resistance of previous highs and lows requires higher trading skills and experience. This operation will also result in a larger reward-to-risk ratio, so the difficulty of execution will increase. You can weigh it in your mind.

Question 3: Is it possible to increase the position size?

Increasing the position size is feasible, but do not increase it too much. In the example above, a 1% proportion of the principal was used. The position size can be increased to 1.5% or 2%.

Before increasing the position size in actual combat, you must have a psychological expectation for drawdowns, knowing that you may encounter consecutive stop losses. Just don't panic after a loss.

As the overall position size increases, the profit amount will also increase, but the psychological pressure will also be greater. No matter what, the mentality must not be shattered, otherwise, all efforts will be in vain.

Emphasize that especially for trading patterns with a large reward-to-risk ratio, the success rate decreases, and the number of consecutive losses increases. At this time, if the position size becomes heavier, the psychological pressure increases exponentially, which may shatter trading confidence. You must pay special attention to this.Question 4: If not using a fixed stop-loss amount for money management rules, can we switch to a fixed position size instead?

A fixed position size means that the number of contracts opened for each trade is constant, for example, always opening 0.3 or 0.5 contracts per trade.

In the trading record, there is a column that records the change in the profit and loss points of each order (the data in the blue box in the figure). I added up all the profit and loss points, and the resulting value is over 650 points.

If you open a position with 0.3 contracts for every 10,000 USD, the profit amount is also around 1,800 USD, with a profit margin of about 18%.

With this trading system using a fixed position size, there is one issue to be aware of: in trading opportunities with a large stop-loss space, the order's stop-loss amount will be significant. For instance, there was a trading opportunity in the record where the stop-loss was 87 points, and with a 0.3 contract position, the stop-loss was 250 USD, which is quite substantial.

Therefore, when using a fixed position size for trading, the position should not be too heavy, otherwise, the psychological pressure will increase, and it will be difficult to execute.

Question 5: What if swing trading misses the major trend?

As we discussed at the beginning of the article, swing trading is about capturing a segment of the profit space in the market, and orders will actively take profit, which means it is not possible to catch the major trend. This is its characteristic and also its drawback.

However, everything has two sides. In a consolidating market, this drawback becomes an advantage. Let's look at an image.

The image shows a schematic diagram of a swing trade.After entering the market with a short position, the market fell, just reaching the profit-taking level of 2:1. As soon as the order was closed with profit, the market reversed and went up again, breaking the high once more.

This trade was a swing trading method, using a 2:1 profit-taking ratio to exit with a profit. If a trend-following trading logic had been applied to exit the trade, the order would have resulted in a stop loss.

Here we can see the advantage of swing trading.

Every trading logic has its strengths and weaknesses. While we enjoy the profits brought by its strengths, we must also accept the risks it may bring. This is a matter of trade-off.

Today, we take a case as a starting point to explain the ins and outs of swing trading quite clearly and provide a thought process for solving trading problems. In your own trading, you should record more, analyze more, and test more to gradually find your own trading rhythm and the most suitable pattern for yourself.