Swing Trading Strategies Part 1: Trend Continuation
In this two-part series, we’ll explore straightforward yet effective swing trading strategies. Part 1 focuses on a classic trend continuation strategy designed to capitalise on established market trends.
Understanding the Trend Continuation Strategy
The trend continuation strategy is built on the principle of trading in the direction of the prevailing trend. The strategy looks to capture one swing of price action that occurs following a breakout in the direction of the prevailing trend.
Whilst the strategy is likely to struggle during choppy sideways markets, the risk management and trade management components are designed to try and keep losses small during adverse conditions, while letting trades run during optimal trending conditions.
Here’s how you can implement this strategy:
Key Components of the Strategy
Entry Criteria:
• 50MA Must Be Moving Above 200MA
The first criterion for this strategy is that the 50-day moving average (MA) must be above the 200-day moving average. This indicates an established uptrend and serves as a foundational signal that the market has bullish momentum.
Past performance is not a reliable indicator of future results
• Contracting Range Has Formed
Look for a contracting range, which typically appears as a series of price movements that become progressively narrower. This pattern suggests consolidation and a potential imminent breakout in the direction of the trend.
Past performance is not a reliable indicator of future results
• Break and Close Above Contracting Range
A break and close above the contracting range is a sufficient entry trigger.
Past performance is not a reliable indicator of future results
Risk Management:
• Initial Stop Below Range
An initial stop loss is placed just below the lower boundary of the contracting range. This serves to define your risk by protecting your position in case the market moves against you.
Past performance is not a reliable indicator of future results
Trade Management:
Trailing Stop at 9EMA
Once the trade is active, use the 9-day exponential moving average (EMA) as a trailing stop. This allows you to lock in profits while giving the trade enough room to continue moving in your favour.
Past performance is not a reliable indicator of future results
Step-by-Step Guide to Executing the Strategy
1. Identify the Trend: Begin by ensuring that the 50MA is above the 200MA on your chart. This confirms that the market is in an upward trend and sets the stage for the rest of the strategy.
2. Spot the Contracting Range: Look for periods where the price forms a contracting range. This can be visualised as a series of highs and lows that are getting closer together. This pattern often precedes a significant price move.
3. Enter the Trade: Enter the trade when the price breaks out of the contracting range in the direction of the trend (i.e., upwards in this case). Ensure that the breakout is accompanied by increased volume, which indicates stronger momentum.
4. Set Your Stop Loss: Place your stop loss just below the lower boundary of the contracting range. This helps to protect your position from unexpected market reversals.
5. Implement the Trailing Stop:Once the trade moves in your favour, use the 9EMA as a trailing stop. Adjust the stop level as the 9EMA moves up, allowing you to lock in profits while giving the trade room to grow.
Example: Gold
In the example below, we can see that the gold market this year has formed several entry opportunities using this swing trading strategy. With the 50MA comfortably above the 200MA all year, prices have compressed within contracting ranges on multiple occasions. While not every breakout from compression works, the overall trend direction guided by the 50MA and 200MA crossover has provided a strong framework for identifying potential trades. By placing stops just below the lower boundary of these contracting ranges and using the 9EMA as a trailing stop, traders could have captured several upward swings.
Gold (XAU/USD) Daily Candle Chart
Past performance is not a reliable indicator of future results
Limitations of the Strategy
While effective in trending markets, this trend continuation strategy has notable limitations. It relies on clear trends, which may not always be present, leading to false signals in choppy or sideways markets. The use of moving averages like the 50MA and 200MA introduces lag, meaning traders might miss early parts of the trend. Contracting ranges can sometimes result in false breakouts, causing premature trade entries or exits. Additionally, trailing stops with the 9EMA might stop out positions during minor retracements in a strong trend. Finally, like any strategy, the trend continuation method requires discipline and consistent application to be effective, and it may not suit all trading styles or risk tolerances.
Conclusion
The trend continuation strategy leverages moving averages and price patterns to identify and capitalise on strong market trends. By focusing on a contracting range within a bullish trend, and using a trailing stop to manage risk, this strategy offers a disciplined approach to swing trading.
In the next part of our series, we’ll explore another straightforward yet effective swing trading strategy.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83.51% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
Understanding the Trend Continuation Strategy
The trend continuation strategy is built on the principle of trading in the direction of the prevailing trend. The strategy looks to capture one swing of price action that occurs following a breakout in the direction of the prevailing trend.
Whilst the strategy is likely to struggle during choppy sideways markets, the risk management and trade management components are designed to try and keep losses small during adverse conditions, while letting trades run during optimal trending conditions.
Here’s how you can implement this strategy:
Key Components of the Strategy
Entry Criteria:
• 50MA Must Be Moving Above 200MA
The first criterion for this strategy is that the 50-day moving average (MA) must be above the 200-day moving average. This indicates an established uptrend and serves as a foundational signal that the market has bullish momentum.
Past performance is not a reliable indicator of future results
• Contracting Range Has Formed
Look for a contracting range, which typically appears as a series of price movements that become progressively narrower. This pattern suggests consolidation and a potential imminent breakout in the direction of the trend.
Past performance is not a reliable indicator of future results
• Break and Close Above Contracting Range
A break and close above the contracting range is a sufficient entry trigger.
Past performance is not a reliable indicator of future results
Risk Management:
• Initial Stop Below Range
An initial stop loss is placed just below the lower boundary of the contracting range. This serves to define your risk by protecting your position in case the market moves against you.
Past performance is not a reliable indicator of future results
Trade Management:
Trailing Stop at 9EMA
Once the trade is active, use the 9-day exponential moving average (EMA) as a trailing stop. This allows you to lock in profits while giving the trade enough room to continue moving in your favour.
Past performance is not a reliable indicator of future results
Step-by-Step Guide to Executing the Strategy
1. Identify the Trend: Begin by ensuring that the 50MA is above the 200MA on your chart. This confirms that the market is in an upward trend and sets the stage for the rest of the strategy.
2. Spot the Contracting Range: Look for periods where the price forms a contracting range. This can be visualised as a series of highs and lows that are getting closer together. This pattern often precedes a significant price move.
3. Enter the Trade: Enter the trade when the price breaks out of the contracting range in the direction of the trend (i.e., upwards in this case). Ensure that the breakout is accompanied by increased volume, which indicates stronger momentum.
4. Set Your Stop Loss: Place your stop loss just below the lower boundary of the contracting range. This helps to protect your position from unexpected market reversals.
5. Implement the Trailing Stop:Once the trade moves in your favour, use the 9EMA as a trailing stop. Adjust the stop level as the 9EMA moves up, allowing you to lock in profits while giving the trade room to grow.
Example: Gold
In the example below, we can see that the gold market this year has formed several entry opportunities using this swing trading strategy. With the 50MA comfortably above the 200MA all year, prices have compressed within contracting ranges on multiple occasions. While not every breakout from compression works, the overall trend direction guided by the 50MA and 200MA crossover has provided a strong framework for identifying potential trades. By placing stops just below the lower boundary of these contracting ranges and using the 9EMA as a trailing stop, traders could have captured several upward swings.
Gold (XAU/USD) Daily Candle Chart
Past performance is not a reliable indicator of future results
Limitations of the Strategy
While effective in trending markets, this trend continuation strategy has notable limitations. It relies on clear trends, which may not always be present, leading to false signals in choppy or sideways markets. The use of moving averages like the 50MA and 200MA introduces lag, meaning traders might miss early parts of the trend. Contracting ranges can sometimes result in false breakouts, causing premature trade entries or exits. Additionally, trailing stops with the 9EMA might stop out positions during minor retracements in a strong trend. Finally, like any strategy, the trend continuation method requires discipline and consistent application to be effective, and it may not suit all trading styles or risk tolerances.
Conclusion
The trend continuation strategy leverages moving averages and price patterns to identify and capitalise on strong market trends. By focusing on a contracting range within a bullish trend, and using a trailing stop to manage risk, this strategy offers a disciplined approach to swing trading.
In the next part of our series, we’ll explore another straightforward yet effective swing trading strategy.
Disclaimer: This is for information and learning purposes only. The information provided does not constitute investment advice nor take into account the individual financial circumstances or objectives of any investor. Any information that may be provided relating to past performance is not a reliable indicator of future results or performance. Social media channels are not relevant for UK residents.
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 83.51% of retail investor accounts lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money.
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