Breakouts, Swing Trades, and Trend Positions
by Richard Cox
Most traders tend to identify with a single strategy because this makes it easier to approach the market on a daily basis. Three of the most common approaches can be seen in Breakouts, Trends, and Swing trading. Here, we will look at some of the virtues of each approach.
Trend trading is perhaps the most common trading system in technical analysis. In an uptrend, we are looking for a series of higher highs and higher lows. These conditions are then used as the basis for long (bullish) positions. Conversely, in a downtrend, we are
looking for a series of lower highs and lower lows. These conditions are then used as the basis for short (bearish) positions. It can be easy to spot trends, and their reversals (such as when trend lines break). Because of the simplicity of these systems, trend trading is generally ideal for newer traders. This is why one of the market’s most famous maxims is: “The trend is your friend, ride it until the end.”
Breakout trades are generally taken when a major level of resistance or support is broken. Once a major range is plotted on your chart, watch for prices to violate that range to the upside before taking long positions, or to the short side for short positions. Additional confirmation for these strategies that can be used, as well: “Traders using a breakout strategy will be able to turn the odds in their favor.” said Haris Constantinou, currency analyst at TeleTrade, “by using indicator readings (such as overbought or oversold positions) to confirm the initial bias.” Money management strategies are then implemented in order to maximize gains and limit
losses. Over the longer term, breakout strategies can be a highly effective way of identifying solid trading entries that are easy to visualize on your trading charts.
Swing trades can offer investors a key alternative strategy when other types of strategies (such as a breakout approach) are not appropriate given the state of market conditions. In these cases, switching an approach to an alternative method (such as a swing trade) can give traders some additional flexibility that can be adapted to the current market conditions. One similar element that should be clear in both of these strategies, however, is that they are primarily technical in nature and rely mostly of chart formations and price behavior. In Swing trades, we are able to capitalize on retracements in a larger trend. In this respect, Swing trading offers something like a “middle ground” between Trend trading and Breakouts. This is because Swing trades are able to capitalize on the underlying momentum of the trend but at better prices than in Breakout trading. So, when looking to determine your preferred trading strategy, it is important to consider all available options. There is truly something in the technical analysis “playbook” for everyone.