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What is Swing Trading?
Swing trading is a style of trading that holds an open position(s) at least overnight and up to several days or even several weeks. It can combine both the technical analysis aspect of day trading and the fundamental research aspect of investing. Swing trading still involves active position management but utilizes longer time intervals to determine price targets and stop-loss levels. Many prefer swing trading as the wider time frames tend smooth out short-term “noise” resulting in a more calmer experience compared to the frenetic pace of day trading.
Swing Trading Vs. Day Trading
As the name states, it’s “day” trading which limits the trading activity to a single daily trading session. The United States equities markets officially open for trading at 9:30 am EST (Eastern Standard Time) and close at 4:00 pm EST every Monday through Friday. Day trading is a style of trading that seeks to profit from buying and selling stocks (or any tradeable financial instrument) intra-day and closes out all positions before the market close. This style doesn’t incur overnight risk since everything is closed out to cash by the end of the day.
Pre-market trading can start as early at 4:00 am EST. through ECNs (electronic communications networks) and close at 8:00 pm EST. Check with your specific online broker to confirm access information.
Similarities Between Day Trading and Swing Trading
Day trading and swing trading share many similarities. In fact, swing trading can almost be considered a form of day trading that is performed on a much larger time frame. The same type of trade management and pattern set-ups are utilized, but with wider price ranges.
Seeks To Profit From Near-Term Price Action Versus Buy and Hold Investing
Both day trading and swing trading seek to profit from relatively shorter/near term price action compared to a buy and hold investment strategy. Long-term investments may be held for years in a passive capacity. Day trading involved the most active management from minute to minute. Swing trading still requires monitoring depending on the holding time, but can range from hourly to daily.
Pattern Set-Up Based Trades
Both day trading and swing trading revolve around playing chart pattern set-ups using technical analysis. Day trading focuses on the shorter time frame version of a particular pattern, while swing trading focuses on the longer time frame version of the pattern. By using a combination of indicators and pattern set-ups, both types of traders seek to enter and exits positions for a profit, while managing risk and reward.
Can play both sides of the market
Both day trading and swing trading can play long or short positions. While any exposure in the market either long or short can bear risk, a short position tends to carry much more potential risk due to the possibility of a short-squeeze. Overnight and swing short positions must be monitored more carefully since these require the use of margin to borrow shares. The potential of loss is technically unlimited.
Differences Between Day Trading and Swing Trading
Swing trading encompasses a longer holding period due to utilizing wider time frame charts. The charting time frame intervals commonly used for swing trading are 15-minutes, 30-minutes, 60-minutes, daily and weekly. Traders looking for more precise entry and exits will shift to the 1-minute and 5-minute charts for trade executions.
Overnight Event Risk
The literal distinguishing difference between day trading and swing trading is the overnight event risk factor. Day trading takes no overnight positions, whereas swing trading involves taking overnight position(s) that can span up to several weeks. Day traders believe that the uncontrollable and unpredictable nature of an overnight event is too much risk to bear, especially since they have no access to curtailing the risk in the wee hours of the morning before the market opens. Overnight event risk can be as common as a gap down in the S&P 500 futures to a surprise unexpected earnings warning, which can spell disaster for a long position.
Less Monitoring/Efficiency/ Less Time Constraints
Swing trading requires less up close monitoring compared to day trading, where seconds to minutes matter the most. This makes swing trading more convenient for traders who have full-time jobs or limited market access during the trading day. Traders who have a more passive temperament or get wiggled too much with shorter time frames tend to prefer swing trading.
Less Trading Activity
Swing trading costs less in commissions due to the smaller frequency of trades compared to day trading. Swing trades may total just a few traders per week compared to the tens to hundreds of trades that an active day trading may execute.
Swing Trading Under PDT Rules
Traders that do not meet the minimum $25,000 balance under PDT (Pattern Day Trader) rules may consider swing trading since overnight positions do not qualify as intraday roundtrips. The PDT rule limits traders to three intraday roundtrips if the balance is under $25,000. Swing trades bypass this stipulation since all positions are held a minimum of one overnight.
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Larger Price Moves
Swing traders can take advantage of larger price moves (i.e. multi-day runners) that may target several points compared to day traders that may target only 10 to 30 cent scalps. However, the larger price swings cuts both ways. Larger stop losses are also used with swing trades. To offset this volatility risk, swing trades tend to hold smaller sized positions (ie: 300-500 shares) compared to day trades that can maximize the use of leverage (ie: 1000-5000 shares) by concentrating on very small holding periods that may last from seconds to minutes.
Tools of the Trade
Whether day trading or swing trading, there are certain basic tools of the trade that you will need in order to give yourself the best chance at success.
This is the style of research that only focuses on the stock’s price action, not the business operations. The stock’s price history is analyzed on a chart to identify and anticipate commonly recurring price patterns. Traders attempt to capture profits by placing trades
The most basic tool of technical analysis is a price chart. There are many types of charts including candlestick, bar and line charts. The charts are also segmented into different time intervals. Day traders tend to prioritize shorter time frame intervals like the 1-minute, 5-minute and 15-minute charts, which are most effective for intraday trading. Swing traders prefer to use larger time frame intervals like the 60-minute, daily and weekly charts. The wider times frames allow for smoother price action.
Chart patterns are based on recurring historical price action. They depict price breakouts or breakdowns. Breakouts form when demand overwhelms supply and causes the price to break out of the current price range as it rises higher forming an uptrend. An uptrend makes higher highs on bounces and higher lows on pullbacks.
Breakdowns form when price falls lower from the current trading range and continue to fall progressively lower forming a downtrend. A downtrend makes lower highs on bounces and lower lows on sell-offs. The method in which price forms these breakouts and breakdowns are identified and labelled for future reference and triggers. Common chart patterns include triangles, head and shoulders, wedges and flags.
Technical indicators are pre-programmed chart tools that measure various factors to assist the trader in analyzing support, resistance and overbought/oversold reading in order to identify trade triggers. Trade triggers are buy and sell signals generated by the price action relative to the specific pattern.
Price and Momentum Tools
Price tools like moving averages and trend lines help to track the direction of the underlying stock. Momentum tools like stochastic, RSI and MACD help to determine if the price move is in the early stages or getting long in the tooth. By combining price and momentum indicators, traders are able to measure and pinpoint entries and exits with improved precision.
Fundamental Analysis: Earnings/News/Press Releases
Fundamental analysis is the research of a company’s operations. Earnings reports tend to have the most material impact on stock price. Both day traders and swing traders will need to pay attention to fundamental analysis to some extent. Day traders will benefits from knowing what may be causing the underlying price gap up or down in a stock. Swing traders will pay more attention to the fundamentals and any relevant data from the company since they are most affected by event risk, especially overnight. The longer the holding time, the more emphasis is put on the news and fundamental factors since stock prices eventually reflect how the underlying business is operating and how the market believes it will perform in the future.
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4 ideas how to trade breakouts
In his book ‘Trades About to Happen: A Modern Adaptation of the Wyckoff Method’ David H. Weis gives a simple but important figure. It is called Where to Find Trades. The Figure is accompanied by a comparison which you will easily understand if you are a fisherman.
Weis writes that the fish bites better at the edges of a lake and not in the middle of it. Consequently, the best trades are executed at the edges of a trading range and not in the middle of it. Here’s the Figure.
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You can see in this Figure:
- Spring and Upthrust – false breakouts.
- Breakout and Breakdown – true breakouts.
Test – testing of true breakouts.
Having analyzed the Figure we may draw a conclusion that nearly the whole speculative trading is reduced to the work with breakouts. Since the best correlations of a potential profit and risk could be found at the edges of ranges.
When the price approaches the boundary ( resistance or support level ), a trader should focus attention and study the market in order to:
- make an assumption whether the boundary will be broken or not;
- act on the basis of the made assumption.
We will speak about false and true breakouts in this purely practical article . Read in this article:
- why breakouts take place;
- analysis of true breakouts;
- analysis of false breakouts;
- market behaviour before breakouts;
- how to trade – 4 ideas;
- chart examples.
However, let’s state important principles before we consider examples:
- In the majority of cases breakouts do not emerge ‘from nowhere’. It is believed that breakouts are consequences of actions of professional players.
- The general context of analysis of the ‘big picture’ is especially important when you trade breakouts.
- Quote: “The main goal of the market is to make as many fools as possible”. Bernard Baruch.
Why false and true breakouts take place?
If it were not for false breakouts, every trader would have made a profit. But the energy conservation law works not only in physics but also in the financial market. Wealth is impossible for all as well as the eternal engine is impossible. That is why false breakouts take place so that a buy of a new local high (and a sell of a new local low) wouldn’t guarantee a profit.
Let’s make a test. We take a regular strategy tester and launch a strategy of a channel breakout with default settings. You can see the result in the picture below.
- The results of the breakout trading strategy had improved after a satisfactory beginning.
- But then there was a fall. Perhaps, the market started to ‘draw’ too many false breakouts during that phase and the profit from previous trades practically ‘burnt out’.
You will have a similar picture if you test the false breakout trading strategy (reversals) using historical data. The profit growth periods will be accompanied by periods of losses. The invisible hand of the market does it in order to set the chances of traders at about 50:50 correlation.
The chances for success will be less than 50% in real life, since the above test doesn’t take into account slippages, commissions and other nuances.
The task for a breakout identification
Let’s consider a standard task before we start analyzing breakouts in the cluster chart . Let’s have a look at the chart below.
Question. What do you think, is this bearish breakout true? Or it is a false breakout (a trap).
We asked this question in one of the groups where ATAS is actively used by beginner traders for the market analysis and trading ( how to become a trader from scratch ).
As you can see the opinions went practically halves. The right answer is at the end of the article.
How to forecast a breakout?
There is no magic. There is no indicator or any other proven method, which could predict the future development of things – whether there will be a true breakout of the support/resistance or it will be a trap (false breakout) – with 100% accuracy.
However, we have ideas based on our observations of the market. These ideas allow to increase chances for the right answer. Further on we present 4 ideas.
- Each idea is accompanied by an example.
- Each example is true for trading in both sides. If there is a bearish breakout in the chart, the idea is true for a bullish breakout in a mirror-reflected (upside-down) chart.
Idea 1. Analyze volumes
If the price goes down to the support level on decreasing volumes (the ‘No Supply’ situation), there is a high probability that there will be no breakout or it will be a false breakout.
Similarly, if the price increases up to the resistance level on decreasing volumes (the ‘No Demand’ situation), there is a high probability that there will be no breakout or it will be a false breakout.
You can read about ‘No Demand’ and ‘No Supply situations’ in this article .
Consequently, if the price decreases on the growing volume to the support level, it means determination of sellers (pressure of sells, red delta and the volume in the lower part of the candle). It is a precursor of a bearish breakout.
If the price increases on the growing volume to the resistance level, it means determination of buyers (pressure of demand, green delta and the volume in the upper part of the candle). It is a precursor of a bullish breakout.
Example. A situation in the Brent oil futures market. The data is from the Moscow Exchange. We use the Volume and Delta indicators in a cluster chart with the period of 15 minutes.
- A splash of volume at the level of 61.80 ( panic sells as origination of growth).
- Buyers’ pressure (green delta) on the level when approaching a breakout. The volume clusters are in the upper part of the candle.
- Absence of supply (deficit of sellers) can be seen from decreasing volumes in the downward attempt.
- The market response to the ‘No Supply’ signal. Buyers’ pressure (green delta) on the level when approaching a breakout.
- Absence of volume in the lower part of the candle could also be interpreted as a deficit of sellers. No one wants to sell contracts cheap when the price grows.
- Buyers’ pressure (green delta) on the level at a breakout of the level 63.
Let’s consider the same chart with the 5-minute period in order to better study interaction of the volume and price in a cluster chart during a breakout.
The numbers in the two charts are in correspondence. We want to point at a specific market behaviour under conditions of a series of bullish breakouts of the resistance levels. The idea is that if the volume dries out when approaching the resistance, the chances for a breakout decrease. However, if it grows, it means a buyers’ attempt to outbid all sells at the resistance line and push the price higher. Note the delta and general volume in points 2, 4 and 6. It is absorption of all sells by the buyers.
By the way, the breakout in point 4 took place only after the second attempt. The first attempt was between points 3 and 4. Then there was a rollback on the decreasing volume (a sign of the sellers’ weakness) and it added confidence and insistence to the buyers for a new attack which was a success.
Set the footprint with the delta in your market and check how the described principles are visualized on different periods including for bearish breakouts.
Idea 2. Analyze the profile
The longer the price moves within a range, the higher the breakout probability is. The recommendation is based on the Peter Steidlmayer’s theory. We wrote about this theory in the articles:
Theoretically, the market moves in two states – balance and disbalance. Ranges are the states of balance when the price is fit for both sellers and buyers (the price is close to the fair price). It is believed that when the price has moved in consolidation for quite a long period of time (it kept balance), it is ‘ready to go’ and find a new balance.
The profile forms may give a hint.
Here’s an example from the EUR/USD futures market. The data is from the Moscow Exchange .
- Wave 1 has a progress of 63 ticks and volume of 117k contracts (delta = -1.4k).
- Wave 2 has a progress of 40 ticks and volume of 201k contracts (delta = -6k).
- The general profile starts to form the ‘b’ shape since wave 2 has a small progress on a bigger than wave 1 volume. Read about Bag Holding , which is a sign of an incoming support.
- A small trap (will be described in the idea below) …
- … and a growing pressure of the buyers (it is seen from the green delta) promise a true breakout of resistance line 6.
Idea 2. Analyze the profile
Have you noticed a breakout in development? Concentrate to the maximum. As a rule, the trading process develops very fast during a breakout and a trader doesn’t have much time for contemplation. It is desirable to hold the whole context in your head and act without hesitation. There might not be another chance for a successful entering any more.
Example. A trap for buyers before a downward movement. The data are from the Bitfinex.
- The trading range was formed during several days. The profile formed a bell-shaped curve of normal distribution. Traders became bored waiting for a breakout.
- It seems like this is a breakout! The price grows upward fast outside the profile limits. Many bored traders entered into longs expecting to make a profit on cryptocurrencies .
- But pay attention to the ‘green splash’ by the delta at the level of 9,600. There is a closure on lows. Could it be a false bullish breakout?
- Entry of sellers (a powerful red cluster) confirms this assumption.
- One more confirmation.
- The situation with the balance area (1) worked out in such a way so that the false bullish breakout (3) resulted in the true bearish breakout (6).
- the change by the delta with a splash on clusters;
- the bounce from the round level;
- the general bearish context (not shown in the chart).
These are typical signs of a false breakout.
Idea 4. Assess traps before a breakout
As we already wrote, the main task of the market is to make as many fools as possible. This statement of a distinguished financial expert has a direct attitude to breakouts, since big and quick money could be made namely on the sharp price jumps.
That is why, even if you correctly identified an approaching bullish breakout and took a respective position, a small downward dodge before the growth (with the goal to hook the buyer stop losses) will not give you an opportunity to make money and, on the contrary, will bring you a loss, which is very frustrating.
Similarly, a small upthrust (a false growth) is met, in the majority of cases, just before a bearish breakout.
We showed in idea 3 an example of how a false bullish balance breakout resulted in a true bearish breakout. It was a large-scale trap. Such traps of smaller sizes take place much more often. They could be used as indicators of a direction of a true breakout.
And now we approach the answer to the question asked at the beginning of the article about whether the breakout is false or true. Find the correct answer below.
The breakout is true. And here are some facts which help to answer correctly. First of all, it is a bearish context (downward movement through the level of 1,500 in the background).
- A trap for buyers above the level of 1,495.
- A trap for buyers above the level of 1,490.
- A splash of sells at the moment of a breakout increases chances for a further downward movement.
We started this article with a fishing example and let’s end it with the same analogy. Small traps before breakouts is an analogy of the fishing rod movement by fishermen to hook the fish. A fisherman moves the fishing rod into one direction and the fish follows the bait. Then the fisherman sharply jerks the fishing rod in the opposite direction and the fish is hooked.
Breakouts take place every day in a big number and in any market. A trader can see false and true breakout patterns just after 5-10 ticks. That is why the breakout analysis should be practiced as thoroughly as possible.
We wrote earlier about:
- how to trade breakouts in the Strategy of using the footprint through the example of Dax article;
- channel breakout in the Technical analysis of channels and horizontal channels article;
- false breakout trading strategies in the TOP-5 simple volume trading strategies article.
The current article also adds some ‘food for thought’ with respect to the breakout analysis.
How to apply this in practice?
- Download ATAS.
- Analyze breakouts in your selected market / period.
- Find regularities and practice to track them in real time.
- Check your skills on the demo account.
You will get an excellent skill for making money in the financial markets after you learn to trade (false) breakouts correctly. Lucky fishing!
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How do I Use Trading Charts ?
The charts featured on the easyMarkets platform are highly flexible and easy to use. They help you understand how a market or instrument has performed over a set time period. Charts can also help you discern emerging or diminishing trends, volatility and price action surrounding events.
Different chart types
Log into the easyMarkets platform and click on the ‘candlestick’ symbol to choose the chart type you prefer – bars (A.K.A. OHLC), candlesticks, hollow candlesticks, Heikin Ashi, Line, Area and Baseline. On the right-hand axis of the chart (the Y axis) you see prices and on the bottom (or X) axis you have time frames.
Bar charts (also known open-high-low-close or OHLC charts) give volatility information that you won’t get with line charts. You can determine volatility through the height of the bars and the market sentiment through the price range from open to close.
In the image on the left-hand side we see the closing price is higher than the opening price meaning that the overall price direction was positive and therefore bullish. The image on the right shows a bearish price sentiment where the close price is lower than the open. The colors of the bars depend on the closing price versus the previous days close. A green bar shows that the close price is higher than the previous day’s close. If the close price is lower than the previous day’s, then the bar is red.
Candlestick charts are one of the most popular ways to view prices as they provide quite a lot of information in a quick and easy manner. The ‘candles’ have a rectangular solid body, showing the range between opening price and closing price. The candles also have vertical lines (or wicks) at the top and bottom that show high to low range. A green candle shows that the close was higher than the previous close while a red candle shows the opposite – that the close was lower than the previous close.
The Hollow Candlestick chart is a variation on one of the more popular types of charts – candlesticks. Instead of all candlesticks being the same albeit being red or green that shows whether the opening price is higher or lower than the closing price – some of these are hollow. In the case where the closing price is higher than the opening price it is green and known as a bullish candle, inversely if the opening price is lower than the closing price the candlestick is red and known as a bearish candle. The hollow candlestick chart gives another layer of information comparing the previous trading day with the current day’s prices.
Solid Green Candle:
Indicates a close price higher than the previous close price but both lower than the current day’s opening price.
Hollow Red Candle:
The closing price is lower than the previous sessions, but both are higher than the current day’s open price.
Solid Red Candle:
The close price is both lower than the previous and the current day’s open price.
Similar visually to candlestick charts, the Heikin Ashi instead chart average price movements –resulting in a smoother chart – that is purported to better delineating trends. This in turn also means that Heikin Ashi does not display the opening and closing prices exactly.
Line charts are perhaps the simplest way to view the data. A line is drawn across all closing prices to enable a reading of price action over a set period of time. They offer a quick and clear view of price direction.
At the top of the chart you can select which time scale (or period) you wish to view the chart in – from 1 minute to hourly and daily.
Across the top of the chart you can select and overlay indicators on your chart for technical analysis. If you select the ‘Indicators’ you will get a large range of trend indicators to choose from that will displayed in a separate dialogue box. These include Moving Average and Bollinger Bands® to name two and oscillators like RSI and MACD.
This allows you to add the charts of two markets onto the one chart so you can see how they compare and even analyze any correlations or divergences. In the image you can see the EUR/USD candlestick chart and below the XAU/USD (gold) line chart.
On the left-hand side of the chart you have a range of tools to customize your view. Tools may help traders to recognize trends as they draw and mark up the charts.
The Pointer Tool
This lets you zoom into details on the charts with cross hairs, a point or an arrow so you can get a more precise reading.
Trendlines help identify up, down or sideways trends by drawing a line between two highs or two lows. This makes it one of the most popular tools used on charts.
The basic trendline shows you a line segment; a ray shows an extended trendline to the right. The extended trendline extends in both directions. Parallel channels allow for quick drawing of parallel trendlines – you only need to draw the one line while the other is automatically generated.
Within the broader category of trendline are different tools that offer different versions of the basic trendline. While a simple trendline gives a line segment, an arrow shows a trendline with an arrow, and a ray draws a right-extended trendline. ‘Extended’ gives a trendline that is extended automatically from both the sides.
Freehand and predefined shapes can help you further lay out and mark your analysis.
Annotate your chart with text and anchor it to specific area. Use various text shapes when analyzing price movement to help you better distinguish or label potential trends.
These overlays can be used when trading to discern patterns and trends emerging. This includes Elliot Waves, Cyclic Lines, XABCD patterns and much more. Up to 14 different patterns to choose from.
This allows you to measure the change in price, the timeframe and the bars that is enclosed in the area you drew.
This is a standout chart feature, instead of fumbling around while drawing lines on an exact wick – magnet mode will snap the beginning of it to the closest OHLC value.
Beyond the features mentioned in the article for analysis our latest chart update also allows the trader to:
Stay in drawing mode
Lock all drawing tools
Hide all drawing tools
Show object trees – which shows all the graphical actions made on the chart in the form of a drawing or an overlay.
A delete/clear function – this tool allows you to remove drawings (or drawing tools) remove indicators or remove both drawing tools and indicators.
These tools allow for a much more user-friendly experience, quick analysis when on the market, but extensive enough when used in an education/demonstrational way.
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EF Worldwide Limited is part of Blue Capital Markets Group.
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cTrader unites the most important attributes a trading platform should have. It caters to every type of trader by offering a modern and intuitive platform, which combines high performance from any location or device, with rich charting and analysis tools. All features are easy to find, apply and modify.
Charting and Trading in cTrader are complementary functions that seamlessly work together. cTrader’s Chart Trading is responsive and effective. Traders can create Market, Limit and Stop Orders with QuickTrade settings, to open orders with Stop Loss and Take Profit.
Existing Orders and Positions can be modified at any time, by simply dragging and placing elements on the chart. This advanced functionality entirely bypasses order tickets, making trading even easier.
A huge variety of charts to suit different strategies. There are 6 zoom levels for an in-depth or birds-eye view of currency price action, with line studies automatically adjusting to the timeframe and zoom level. Charts feature 54 time frames for:
All the tools needed for effective technical analysis, including trend indicators, oscillators, volatility measures and line drawings, are all accessible directly from the chart. Over 70 pre-installed indicators, as well as a number of objects, including shapes and text, are available.
cTrader supports custom indicators, built in cTrader Automate, through the use of C#, or downloaded from the cTrader Store, which is part of a mature and engaged community of thousands of developers.
Chart Viewing Mode
Charts are detachable, and act as a stand-alone, tradable desktop application, to be used across multiple screens. Each window includes all tools with a full-screen, resizable option. Inside the application, charts can be viewed, using different layout modes to fit any trading style.
ChartShots™ are a great way to share ideas, trading examples, and technical analysis strategies with other traders. Click once with the ChartShot™ tool to open the image in a unique URL with multiple sharing options, available and fully brandable by brokers.
You can embed the chart directly into your web page or blog, or post it straight to your Facebook, Twitter, or any other social media platform.
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