Swing strategies

Swing strategy

Swing strategy consists in successfully riding the trend in the proper direction and taking advantage of small trend retracements (the market never moves in straight lines). In order to do it properly it’s a must to identify support and resistance lines. The more they were tested the more important they become for our analysis. If a support/resistance zone is tested multiple times then there are good chances that it will be rejected again. Simply going short at resistance and long at support is just a hit and hope strategy that leads you nowhere. Therefore, multiple timeframes are needed along with a brief price action analysis. According to my experience, unlike breakout strategy, in order to be successful on the long run, swing based strategies needs a larger stop loss and a higher timeframe. There is a logic in this behavior: a strong rejection represent a clear sign that the price doesn’t have the strength to go further, but still, that level will be retested several times or even broken for a very short period of time before a real retracement that’s why large stops are needed.

Here is an example:

Swing example

Swing example

In the first case, right after the short candle, a longer candle popped out, the last candle was longer than each of the last 10 candles which means a strong rejection.

In the second case, the same thing happened: the last short candle is much bigger than any of the previous 4 candles, in fact it was bigger than all of them added.

In the third case the previous short candle has a large lower shadow, the lower shadow is larger than its body followed by a strong up candle representing a strong rejection.

Let’s discuss the third case a little bit: the strong up candle is a clear buy signal, but when should I exit this trade?

Swing example 2

Swing example 2

If we switch the next higher timeframe (I’m watching H4, the next higher timeframe is D1) I notice that the trend points down. I switch back on H4 and notice that:

1. the blue trendline is not broken.
2. 1.23270 still holds as a resistance line, there is not much power for the trend to go up.
3. On the other hand 1.22790 is a strong support area

The safest thing it crosses my mind right now is to close that trade for a few pips profit and wait until support/resistance line is broken and buy/sell at retest level. I set my stop at breakeven and profit at 1.23270. This way I got nothing to lose.

But the ideal situation for swing strategy looks like this:

Swing example 3

Swing example 3

I’m still on H4. I switch to daily and I see a strong downtrend. I switch to H4 again and start selling at retracement points. My rule is to sell only if current retracement level is lower than previous one, this means that the downtrend will continue. The question is: when should I close my positions?

I closed my first position when a large up candle occurred and closed above previous larger short candle.
I closed my second position when a noticed a rejection: one short candle followed by a long candle both having the same lower shadow size.
I closed my third position after I noticed a short candle with a big lower shadow indicating a small rejection. I could have let it flow but better safe than sorry.
The forth position is still open at the moment I’m writing this.
For all positions, I placed my stop loss 30 pips above retracement levels.

Rules to build a successful swing strategy

1. Always watch the higher timeframes in order to identify the trend direction

2. Trade only near short term support/resistance lines. Go long when the support line is retested from above and short when resistance line is retested from bellow.

3. Confirm your entries using price action, this step is very important!

4. Use majors that have a tendency to trend (EURUSD for example).

5. Even if stop loss is large, take profit should always be equal or larger than stop loss otherwise the strategy won’t make profits in the long haul.

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