The key point for swing trading is finding a market that is trapped in a
sideways trading range (also called a congestion area), or in an up-trend or
down-trending channel on the chart (remember, channel!). When observing from the chart, the trader must be able to distinguish some clear support and resistance levels that are boundaries of the congestion area or channel. When a market price comes close to the support or resistance area boundary, the trader will establish a position: long if prices are moving lower and close to the support boundary, and short if prices are moving higher and towards the resistance boundary. It sounds simple, but remember, trading contains a lot of surprises. The price may break out the support or resistance boundary anytime, therefore skills to response quick, or good money management strategies are always critical characteristics of a seasoned trader.
Swing trading techniques can be used in any chart time frame – daily, weekly, monthly and intra-day charts. Neverheless, the most popular timeframe for swing trading is the daily bar chart.
Note that the strength of the support and resistance at the boundaries is usually determined by the number of times the market has pivoted at the boundaries. The rule is that the more times a market has reached a support or resistance boundary, and then reversed course, the more powerful is that boundary. It can also be said that the longer lasts a channel, the more reliable is that channel. Thus, a trader wants to find a well-established channel or trading range for which to attempt to swing trade.
An exception to this is a market that has been in a trading range, but is bound by one or two powerful spike moves, which also indicate a strong support or resistance boundary. That means some congestion areas that may offer a good swing-trade opportunity do not require several pivot points. In fact, those one or two spike levels would be determined to be a potentially good pivot area for a market.
The swing trader should still use tight protective stops. As I mentioned, a breakout can occur anytime, may due to bad political news etc … Good money management strategies will keep traders out of problems. A good area to place a protective stop is just outside of a support or resistance boundary that makes up the trading channel or congestion area. For instance, if a market in a trading
channel is near the upper boundary of that channel, the swing trader would establish a short position and would want to place his protective buy stop just above the resistance level that serves as the upper boundary of the trading channel. In contrast, if a market is near the lower boundary, the swing trader would establish a long position and place his defensive sell stop just above the support level.
I would explain how to trade in the trending market in the next article. Trade in trending market would be different, it is about identify the signals and ride the trends.