Developing a swing trading strategy

In this lesson, we build on all the concepts we've covered so far to put together a simple swing trading strategy.

What is swing trading?

Swing trading is a trading approach that aims to capture shorter-term price movements (or "swings") within a broader, longer-term trend.

Swing trading involves identifying profitable times to enter trades based on two different types of swing: "swing lows" and "swing highs". A swing low refers to a major price low, while a swing high is a major price high.

It works best in markets that show clear directional trends and enough volatility to create meaningful opportunities. Swing trading can be applied across a wide range of markets, from forex and commodities to stocks and indices. Find out more here.

Swing traders try to capture moves that are positioned between these major lows and highs. In an uptrend a trader would be looking for “long” trades from these lows to high.

In a downtrend, traders look for “short” trades from these highs to lows.

It’s nearly impossible to consistently catch the exact highs and lows of every swing. Instead, the goal is to capture a meaningful portion of the move — often by waiting for confirmation that a swing is underway, even if that means missing the very start or end.

Tip: At its core, swing trading is about trading in the direction of the trend — buying the dips in an uptrend and selling the rallies in a downtrend. While trading signals can help confirm potential entry and exit points, it’s important to build your own analysis skills rather than relying entirely on automated tools. Developing this skillset allows you to trade with greater confidence and adaptability.

Putting it into practice

Using the tools you've already learned in this course, here's how to put it all together into a simple, rules-based swing strategy:

Tip: The best place to practise any trading strategy that’s new to you is in a demo account where no real funds are at risk.

Step 1: Identify the trend

Start by selecting your market and an asset. Then identify the market trend by using a moving average.

Remember, moving averages are technical indicators that smooth out price action by calculating the average closing price over a specified period. This helps traders filter out market noise and identify the underlying trend direction.

Add one moving average (e.g. 50- or 100-period) to your chart.

• If the price is above the moving average, the market is in an uptrend; look for long (buy) trades
• If the price is below, the market is in a downtrend; look for short (sell) trades

Step 2: Time your entry

For this, you'll use an oscillator, such as the RSI or Stochastic Oscillator. Bear in mind that oscillators are most useful when a market is moving sideways or ranging. When the market is trending strongly, they can give premature reversal signals.

• In an uptrend, look for oversold signals (e.g. RSI below 30) to identify potential buy setups
• In a downtrend, look for overbought signals (e.g. RSI above 70) to identify potential short setups

Be careful not to treat overbought and oversold signals as guaranteed reversal indicators — they are alerts, not instructions.

Step 3: Confirm with price levels

Using horizontal lines on your chart, draw key support and resistance levels, which identify levels where the price has historically turned or changed direction.

• For long trades: look for price bouncing from support within an uptrend
• For short trades: look for price rejecting resistance within a downtrend

Step 4: Plan your target

Again, using horizontal levels, set your targets.

• In an uptrend, aim to take profit near the next resistance level
• In a downtrend, aim to take profit near the next support level

You can scale out at multiple targets if preferred (instead of closing your entire trade at one price level, you gradually take profits at different target levels as the trade moves in your favour).

Step 5: Calculate your risk-reward ratio

Before placing any trade, calculate your risk-reward ratio by comparing your potential loss (distance to stop-loss) with your potential gain (distance to profit target).

A risk-reward ratio of 1:2 means you're risking $1 to potentially make $2. For swing trading, aim for a minimum ratio of 1:2, though 1:3 or higher is preferable.

Here's how to calculate it:

• Risk: Distance from entry price to your planned stop-loss
• Reward: Distance from entry price to your profit target
• Ratio: Reward ÷ Risk

For example, if you're entering a long trade at $100, with a stop-loss at $97 (risking $3) and a profit target at $109 (potential gain of $9), your risk-reward ratio is 9 ÷ 3 = 1:3.

This means even if you're only right 40% of the time, you can still be profitable long-term. Poor risk-reward ratios (like 1:1 or worse) require much higher win rates to remain profitable, making them unsuitable for most swing trading approaches.

If your calculated risk-reward ratio is less than 1:2, consider:

• Adjusting your profit target to a more distant resistance/support level
• Waiting for a better entry point closer to your planned stop-loss
• Skipping the trade entirely

Tip: Professional traders often focus more on risk-reward ratios than win rates. A trader with a 1:3 risk-reward ratio only needs to be right 25% of the time to break even, while someone with a 1:1 ratio needs to be right 50% of the time.

Step 6: Set your stop-loss using volatility

When it comes to measuring price volatility, we previously explored how the Average True Range (ATR) indicator focuses solely on volatility and adapts to different market conditions and timeframes, providing valuable insights across various financial markets, including forex, stocks, indices, and commodities.

Using the ATR indicator on your chart, measure the current ATR value. Set your stop-loss at 1-2x the ATR below (for long) or above (for short) your entry.

Step 7: Calculate position size

This part is personal — you need to decide how much of your account you're willing to risk (e.g. 1% or 2%). Use the ATR-based stop distance to calculate how many units you can afford to trade. This keeps your financial risk consistent, no matter the asset's volatility.

Step 8: Watch for reversal patterns

Here's where those head and shoulders chart patterns (which indicate a shift from a bullish trend to a bearish trend) and inverse head and shoulders chart patterns (which indicate a shift from a bearish trend to a bullish trend) come into play. These can help you exit early or avoid entering at the wrong time.

Step 9: Keep practising and stick to your "rules"

Remember the Turtle Traders? They were given a set of mechanical technical rules to trade with, along with some money management techniques, and had great success.

This basic swing trading strategy is meant to be mechanical and consistent. Don't try to catch every move — focus on high-probability setups where trend, momentum, and support/resistance align.

Track your results and refine as you go.

Build your confidence without risking real funds, in your demo account.