Swing Trading Patterns
Identifying swing trading patterns is among the most adaptable skills you can learn about trading. Trading patterns is a technical analysis branch that concentrates on identifying price and sometimes volume patterns. Swing trading using price moves helps traders to discover shifts between rising and falling trends.
Traders look for price patterns that indicate a change in the prevailing market’s trend. They then execute their trades depending on these signals. Swing trading patterns also help traders forecast trend continuations and market reversals. Therefore, patterns play a critical role in helping swing traders find their feet.
This article will cover some key swing trading patterns, including charts, candlestick, and wedge patterns, and some best swing trading patterns worth giving a try. Let’s dive into it.
How to Do Swing Trading
Swing trading is a trading style that involves holding trades for several days, weeks, or months to benefit from anticipated price actions. The following steps can help you get started with swing trading.
- Create a live trading account. Select recognized brokers to avoid any disappointments.
- Research assets markets using technical indicators. Here tools like pattern recognition scanners can help you identify trends and other price-related signals that can help you decide what to trade.
- Select your suitable swing trading asset. Upon completing your research, it’s time to select the asset that best suits your trading plan and goals.
- Utilize risk management features. Include a take profit and stop-loss order to curb any risks.
- Monitor your trading position. Always watch your trade as it is open. Beware of slippage and gapping in the asset market’s sentiments.
- Exit trade. If your stop-loss order didn’t close your trade, close it according to your trading plan.
Why Use Swing Trading Patterns?
Swing traders do not trade blindly because if you do, you can lose all their investments within a short period. Trading patterns provide a visual representation of the current market trends. As a result, it eases the process of locating suitable markets that match their individual trading plans.
Also, patterns for swing trading help traders make informed trading decisions. This is because they can spot potential trading opportunities that when exploited can generate profits.
Best Patterns for Swing Trading
There are many trading patterns used by swing traders to spot potential trading opportunities. In general, there are two broad types of patterns, continuation patterns and reversal patterns. Continuation patterns happen when a price trend continues in the existing direction after a temporary pause.
On the other hand, reversal patterns occur when an asset price signals a complete change in its pattern direction. For instance, suppose the gold price was increasing before reaching the peak or swing high. In that case, if it starts reducing, then it experienced a reversal pattern.
Swing trading patterns are often generated from charts, providing a graphical and visual representation of markets. Let’s start by introducing charts.
Chart Patterns
Swing trading charts are the most famous approach used by traders to discover patterns and charts. Technical analysts and traders use charts to identify possible trading entry and exit points.
Swing trading charts show trends in a simplified manner, enabling traders to spot them easily. They exhibit reduced market “noise,” helping you to accurately apply other time-insensitive technical analysis strategies.
There are various variations of charts, including Gann-based swing trading charts and Kagi charts. These charts provide a more complicated approach to locating trends. However, they allow traders and trading analysts to make multiple empirical changes that improve their trend-finding abilities.
Candlestick Patterns
The candlestick charts pack information of several time frames into a single price bar. This factor makes them more powerful than other conventional open-high and close-low bars. Candlesticks establish trends that help traders predict price actions once completed.
Their proper color coding increases depth to this vibrant technical analysis tool that dates back to the 18th century. There are several candlestick patterns used by traders to determine price momentum and direction.
Some swing trading candlestick patterns include abandoned baby, evening star, three black crows, and three-line strike. Although candlesticks are effective swing trading patterns, not all emitted signals are reliable in the current electronic environment. Their high popularity reduced their reliability because they are typically analyzed using hedge funds and their related algorithms.
Here is an example of an abandoned baby candlestick graph:
How Does Abandoned Baby Candlesticks Work?
The abandoned baby candlestick is a three-bar reversal pattern. Usually, it is a credible reversal signal, especially if it occurs after a razor-sharp drop or rise. The 1st candlestick faces the direction of the basic trend. The second one is known as doji. It gaps in the primary trend’s direction and does not overlap with the shadow or real body of the previous candlestick.
The last candlestick is in the reverse direction of the 1st day and its gaps in the doji’s reverse direction. You can clearly see this in the graph on the data points for Wednesday through Thursday.
One crucial advantage of abandoned baby candlesticks is that once you notice them in the price chart, you can trade them immediately. In that case, you don’t need to use any additional indicators to substantiate the signal.
Reversal Patterns
As the name suggests, a reversal pattern is where the asset price countertrends completely. Swing trading reversal patterns signify an end of a bullish or bearish trend. The newly established trend pauses temporarily before continuing in the new direction.
A reversal that happens at the market top is called a distribution pattern. It signifies that a trading asset becomes less enthusiastically bought than sold.
On the contrary, if a reversal pattern occurs at the market bottom, it’s called an accumulation pattern. In that case, a trading instrument becomes less sold than bought. There are several popular reversal patterns, including head and shoulders, double bottoms, and double tops.
The figure below is an illustration of a reversal pattern. Where the plot breaks the trend line shows a possible trend reversal.
Wedge Patterns
A wedge pattern is drawn using two converging trend lines moving in one direction. If the wedge is angled downwards, it represents a temporary pause in an uptrend. On the other hand, if the wedge is angled upwards, it shows a brief interruption on a falling market.
Using swing trading wedge patterns is crucial as it provides insight by carving out easy-to-identify levels. Typically, wedge trading patterns feature converging trend lines that span over ten to fifty trading periods. They’re considered as falling or rising wedges, depending on how they are trending. The figure below shows what a rising wedge looks like.
How to Trade Wedge Patterns
Wedge chart patterns involve two trading lines that converge. It implies that the price movement magnitude is decreasing.
Swing Trading Rising Wedge Pattern
A rising wedge typically forms when the prices consolidate between upward sloping resistance and support lines.
When the support line slope is steeper than the resistance line. If such a case occurs, it signifies that high lows are getting formed at a faster rate than higher highs. As a result, it forms a wedge-like pattern.
When prices consolidate, swing traders anticipate a big splash and a breakout to either bottom or the top. Suppose a rising wedge fabricates during an uptrend. In that case, it is a bearish reversal pattern. On the other hand, if it forms during an ongoing downtrend, it can signal a continuation of the downward movement.
In either case, when you identify this swing trading pattern, be ready to enter your trade.
Swing Trading Falling Wedge Pattern
Like a rising wedge pattern, a falling wedge can indicate a continuation or reversal signal. It indicates a reversal pattern when it forms at the bottom of a downward trend. This implies that there is an upcoming uptrend.
On the contrary, a falling wedge pattern signals trend continuation when it forms during an uptrend. In that case, it means that the upwards price movement shall resume. This type of wedge is a bullish pattern.
The figure above is an example of a falling wedge as a reversal indicator. After the downtrend, the asset’s price made lower lows and lower highs. The trendline that connects the lows is less steep than the one connecting the highs.
How to Identify Trading Patterns
Lucky enough, swing traders do not have to draw patterns or identify them manually. This is because they use swing trading pattern recognition screeners that automatically spot trading patterns. These screeners offer you an excellent resource that informs your trading strategy.
Trading pattern scanners save you effort and time while ensuring that you find the best trading patterns and opportunities.
Final Thoughts
As a swing trader, trading patterns should be your close friend. Trading patterns provide crucial insight into emerging market trends, enabling them to execute their trades based on these trends. They help them predict trend continuations and market reversals. Also, traders can identify potentially profitable trade entry and exit points, which is key in informing swing traders’ trading decisions. So, there is great power in trading patterns. Never ignore them!