/ Swing trading: the benefits

What is swing trading

In trading, there is a classification of methods and time scales in which you can act.

Scalping is the most short-term form of intervention, which involves taking advantage of market movements for a few seconds or minutes.

Then there is day trading, which involves trading for a few minutes to a few hours a day.

Then there is swing trading, which usually involves trading for several days, with some swing trades lasting more than a week.

Finally, there is momentum trading, which involves taking advantage of major market trends and is often combined with macroeconomic or microeconomic analysis.

Advantages of swing trading

The advantage of swing trading over scalping or day trading is that the trader's attention will be focused on identifying a particular pattern on the chart, which can have an effect for several days.

Instead of searching for numerous entry points throughout the day and spending a lot of time in front of a screen, which can be psychologically exhausting, swing trading allows the trader to focus solely on certain market configurations, and in particular chart configurations that can relieve the pressure of constantly searching for entry or exit points.

Another advantage of swing trading is that it allows you to identify market configurations that may offer interesting potential to work with. For example, when exiting a range (consolidation channel) from above or below, the technical goal would be to find a projection of the range's high.

If the range has been forming for several weeks and has a significant amplitude, the swing exit movement target will be equivalent to the height of the range, allowing for an ambitious target to be identified in advance that could yield attractive results.

The purpose of swing trading, compared to momentum trading, is to be able to confirm (and deny) a scenario relatively quickly. One of the advantages of swing trading is also the ability to capitalize on corrective movements within major trends that can last for months or even years.

Disadvantages of swing trading

One of the disadvantages of swing trading is that you need to have a fairly deep knowledge of technical analysis to identify certain potential configurations. It may also be necessary to go beyond a purely technical framework to keep an eye on economic or political announcements, as these are potential catalysts for confirming a technical pattern.

If, for example, a pattern on a chart is an ascending triangle that suggests an upward exit and an unfavorable figure or announcement invalidates the pattern, it is necessary to understand why the pattern was invalidated. Reading the weekly economic calendar is also necessary if a technical pattern begins to form.

The second disadvantage of this swing trading technique is the risk of false invalidation signals. Even if it usually makes it easier to screen out unwanted market "noise", the intervention horizon is still relatively short, and some technical setups may be briefly invalidated by market movement without causing a contrary movement, or even just delaying the correct execution of the pattern.

Exiting a consolidation triangle

A consolidation triangle is a pattern that forms gradually over time as the amplitude of price fluctuations decreases. The closer you get to the end of the triangle, the more you need to watch for an exit from this area, as this pattern can accelerate strongly.

The potential for expansion (up or down) is usually determined by the height of the triangle that has just been broken, allowing you to determine at what price it is appropriate to lock in profits.

The direction of market acceleration is potentially determined by the side of the triangle that prices are trying to break out of. False signals can occur before the final exit, so you should always protect your scenario with stops.

Exiting a range or consolidation channel

A range is a phase of lateral price consolidation, i.e. a horizontal movement. Sometimes ranges are formed with a slope (bullish or bearish).

If we consider only the case of a horizontal consolidation channel, the purpose of a swing trade is to wait for the moment when the market tries to break out of this consolidation zone.

The target (bullish or bearish, depending on the direction of the attack on the range boundaries) for the breakout will be equal to the height of the range.

Filling the gap

A gap in price usually occurs between the closing price and the opening price. For example, the next day or after a weekend or holiday when the markets are closed.

Less commonly, intraday gaps can occur when a pattern or event takes the market by surprise, causing prices to move so quickly that gaps occur.

Traders may try to fill these market gaps. The larger the gap, the more prominent it is on the chart and the greater the psychological impact it has on traders who may seek to fill it.

Be careful: some gaps never fill, while others may take days, weeks, months or even years to fill.
In the meantime, the beginning of a gap filling can serve as a catalyst for a reaction and lead to rapid filling in the minutes or hours that follow.

Consolidation Flags

A flag is a consolidation phase within a trend.

A bullish flag is a consolidation phase within an uptrend. The exit from the flag occurs at the top.

A bearish flag is a consolidation phase in a downtrend, so you exit the flag at the bottom.