What is position and swing trading?

What is position and swing trading?

Swing Trading
Photo by @mikeygl

Position and swing trading are two different types of trading style however when you strip them back, they’re in fact very similar to one another.

In this lesson, we’ll take a closer look at both styles and how they do differ, as well as the best strategies to use when swing and position trading.

How do position trading and swing trading work?

Position and swing trading are primarily trend following strategies, where you can apply lots of other styles and techniques over the top. The main premise is to follow the underlying trend, waiting for pull-backs to build a position. 

A bullish trending market is confirmed by the price making higher highs and high lows. This formation looks like swings, hence the name swing trading.

While both styles tend to be trend following, you can also swing trade within a range, essentially using the swings to take you from the support to the resistance or vice versa.

As we mentioned, they are mainly trend following strategies. One of the biggest advantages of these styles is that they don’t have a predetermined target. The reason is that you’re expected to let the market go until it’s overbought or oversold.

Simply leave the position or add to it, so that your gains grow with the market and to ensure that you don’t cut profits early. In your strategy, you would use a signal that would tell you if the trend is over and then take the profit. Or just move your stop loss with the price (an automatic order that closes the trade if a certain price is hit).

Differences between position and swing trading

 

Position trading

Swing trading

Short-medium term time frames. Normally a couple of days to a week or more.

Short term time frames. It can be a couple of hours to a couple of days but not much longer.

Take advantage of the whole trend by often adding to the position on each swing. Holding the position until the whole trend is over.

Predominantly take advantage of single swings within an underlying trend.

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Why are position trading and swing trading important?

They’re important simply because they’re popular. When something is popular in trading, it means lots of traders are doing it and if lots of traders are doing it then there is a high chance that the market will go in that direction.

If something is used a lot, it also means that it works and is why you see lots of traders using both position and swing trading. And they work because they’re primarily trend following strategies, it’s always a lot more difficult to pick a top or a bottom in a market rather than just going in the same direction.

Another reason these styles are popular is that you don’t need to be sitting at your computer the whole time staring at the price. You can take the trade, set your stop loss and take profit (if needed) levels and go about your day.

This means you can therefore position and swing trade while you have another job. It essentially gives you more flexibility and freedom in your life.

Best markets to swing and position trade

Like most strategies and styles of trading, you can use these in any market however there are some that do make it a bit easier. For instance, trading the forex market tends to be a bit easier, because of its accessibility (the fact that it’s open 24/5) and also because it’s so liquid (meaning you can enter and exit at the price you want to ). 

Unlike trading an individual stock, where you might struggle to enter or exit at the price you intended because the price might not trade there (as there are fewer traders). Often the price will gap in illiquid markets and simply jump over the price therefore not trading there. If your order is for that price, then it won’t get filled and you might lose more than you had anticipated.

Being confident to leave an order in the market and know that it will get hit is definitely the piece of mind you do want and why some markets are preferable when position and swing trading.

What are the best position trading and swing trading strategies?

There are lots of different position and swing trading strategies, we’ve highlighted some of the best below:

  • Breakout trading
  • Pullback trading
  • Range trading
  • Support and resistance trading
  • Moving average trading
  • Reversal trading 
  • Trend trading
  • Breakdown strategy 

As these strategies are all trying to catch the same part of the move, some are quite similar to others. 

Breakout trading

Breakout trading is a popular strategy in trading because it is a clear sign that the market intends to move in either direction. It can be used in both position and swing trading and works as a signal to enter the market.

It’s great when a market is consolidating because it is the signal that the period of consolidation is over. The breakout will be in either direction of the range or consolidation period, giving a clear signal that buyers or sellers have taken the initiative. 

You want to see an impulsive candle break above or below the range, support and resistance level or trend line. This can be considered as a candle that is larger than its surrounding candles and one that closes close to the high or low (depending on the breakout direction).

  • A bullish breakout would signal you to go long and buy the market
  • A bearish breakout would signal you to go short and sell the market
Screenshot from MT5

 

Breakdown strategy 

A breakdown strategy is basically the same as a breakout strategy. However, it only happens when the market breaks lower and not higher. Obvious when you say it but if you don’t know, you need to be told. 

This is often found in reversal patterns at the top of a trend, for example, a double top or head and shoulders pattern.

The breakdown is considered a separate strategy in markets that tend to be ‘long only’ markets. For example, when you buy and hold stocks, using a breakdown strategy would be used to help you exit the position.

Breakdown strategy
Screenshot from TradingView

 

Pullback and retracement trading strategy

The pullback is used to enter a trade or add to a trade. This retracement is the market pulling back before the fast move either higher or lower (the move that you want to catch).

Often the pullback is a certain percentage of the previous move. So, you would normally be looking to enter the trade once the market has retraced around 50% of the previous move.

A great tool to help with this is the Fibonacci retracement tool, which plots the percentage the market pulls back. Ideally, you would line this up with another indicator and then look to enter at that pullback level.

For example, if the 50% retracement lines up with a support level, then this would be a good place to buy.

If you’re position trading, then you could look to enter several positions on these pullbacks or if you’re swing trading, then you would be looking to enter on the pullback and take profit once the move is complete.

Pullback and retracement trading strategy
Screenshot from TradingView

 

Range Trading

If you’re range trading, it’s normally best to stick to swing trading rather than position trading. This is because there is a ceiling or floor to the expected gains and therefore harder to build a position.

Despite trading a range, it’s still worth taking note of the underlying trend and ultimately only trading in that direction. You might be trading a range but if it’s in an uptrend, then it’s best to only try and buy while it’s at support rather than selling at resistance.

To swing trade, you would identify a pullback and look to trade it up to the top of the range, if the market is going up.

You can still identify major swings in a range and take advantage of them.

Range trading
Screenshot from MT5

 

Support and resistance

Support and resistance are arguably the most important aspects of technical analysis, so it’s important you understand how you can use them when both swing and position trading.

Position trading using support and resistance

  • When in an uptrend, you would be looking for the market to correct and therefore identify any support levels that would act as good places to add to your position. Here you would enter long positions on the confirmation that the support level would hold.
  • The opposite, of course, would be true in a downtrend. You would be looking for the resistance levels to sell or open short positions at.

Swing trading using support and resistance: 

  • You’d be looking to sell any breaks of support levels and buy any breaks of resistance levels. You would then look to buy back at the next resistance level, therefore trading between levels.
  • And again, the opposite if the market was going up. Buy breaks of resistance and sell again once it reaches the next resistance level.
Support and resistance
Screenshot from MT5

 

Moving average trading

The moving average strategy can use any number of moving average but a popular one used is often the 50. In this strategy, you’re looking to either buy or sell (depending on direction) when the market pulls back to the moving average.

Both position and swing traders can use this strategy to enter the market. It’s best used over a short-medium term time frame.

If the market is above the moving average then you would be looking for buys and vice versa, if the market was below the moving average, you’d be looking to sell the market. And like most other strategies, it is best to follow the underlying trend of the market.

Which moving average you use is up to you but it’s normally advised to use popular moving averages because there is a higher chance the market will hold at those levels. These tend to be 8, 10, 21, 50, 55, 100, and 200 moving averages. However, another good strategy is to find a custom moving average that you find the market holds nicely on and use that. This is found by trial and error.

Moving average trading
Screenshot from MT5

 

Reversal trading 

Reversal trading is as it sounds, it is trading the reversal of a trend. Reversal of one trend can often mean the beginning of a new trend and is a great place for position traders to look to enter.

Alternatively, you can still trade with the underlying trend however, you can go into a smaller timeframe and use the pullback trend as its own trend. Therefore looking for the reversal signal of that to enter in the direction of the underlying trend.

A few key signals that you can use to identify a reversal include:

  • A break of an important moving average or trend line
  • A reversal chart or candlestick pattern
  • A reversal of Dow Theory, the market might start creating higher highs and higher lows rather than lower lows and lower highs (if reversing from a downtrend to an uptrend)
Reversal trading
Screenshot from MT5

 

Trend trading

Trend trading describes the process of looking to trade in the direction of the trend, using trendlines.

We’ve explored this in our lesson on breakout trading

With this method, you could also use moving averages or channel indicators, which we also explored in our lesson ‘What are trading channels?’ 

In either instance, while trend trading is more aligned with position trading, it can also be used as part of a swing trading strategy. You’re essentially looking for a signal to enter the trend. Any rejections on trend following indicators would work. For example, if the market tests a trend line and gives a signal that it will bounce off it, then you would look to enter that trade. A popular confirmation signal of the rejection is candlestick analysis.

Trend trading
Screenshot from MT5

 

Position trading and swing trading summary

The main thing you should take from this lesson is that both swing and position trading gives you freedom in your trading. Meaning that you don’t need to sit and stare at your computer screen while trading.

Both use technical analysis in their approach and also rely on risk management strategies, so do make sure you understand how to use your stop loss, take profit and also entry orders.

Once you’ve done the initial analysis, you can then set your orders and let it go.

Another takeaway is that you can use any number of trading styles when swing trading and position trading. Therefore you can test different strategies to see which one you prefer. Ultimately trading comes down to the individual, so make sure you’re happy with the strategy you pick.

For further insight, go to our previous module on trading plans and article ‘How to get into trading’.

In our next lesson, we’ll look at a style of trading that needs more time and attention. This is one that becomes more of a full-time occupation — ‘What is day trading?

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