There are various ways to make money in the markets, however not all strategies are suitable for every trader. Each trader is different and has unique abilities, personality and attitude towards trading. What works for one trader will not work for another. Which is why it’s critical to learn about various strategies and test them to see what fits you best.
Swing trading FX strategy is highly popular among traders. Intraday traders open and close positions within a day to avoid swaps. When it comes to swing trading, orders remain open longer. It may last a couple of days or even a couple of months. Forex trading swing strategy is aiming for high probability trades and therefore, trades need to be well calculated and planned. Swing traders are generally using the combination of fundamental and technical analysis. And the fundamental analysis in more important in swing trading than in day trading.
Let’s dive deep and find out more about swing trading in FX trading.
Core features of swing trading strategy
- Swing trading is somewhere in the middle between day trading and long-term investing
- Swing strategy for trading Forex is for individuals that do not have time to sit in front of a monitor all day
- FX trading swing strategy can be beneficial for traders that are good at planning and analyzing fundamental factors
- Swing trading is a highly popular method, and it puts a larger emphasis on fundamental analysis
- Swing trades are executed using higher than 1 hour time frames and therefore, traders experience less market noise
How does swing trading strategy work in forex trading?
As the name implies, the purpose of swing trading is to catch price swings in the market. Intraday traders place more orders than swing traders. Which means that swing traders need to be more selective. Usually, swing trades have higher probabilities of positive outcome and good risk to rewards ratio. However, in order to swing trade, traders need a working strategy, discipline and risk management.
Understanding swing trading
Swing trading generally use hourly and larger timeframes. Hourly timeframes are great for finding entries and exists, while daily and weekly charts help make predictions about general market direction. In their analysis, traders use chart, candlestick patterns and indicators, as well as fundamental information.
Economic announcements are more important for position and swing traders than for intraday traders, as economic news takes time to manifest on the charts.
Swing strategy for Forex traders involves fewer trades and more opportunity hunting. If you prefer more active trading, swing trading might not be for you. Traders only enter markets when great opportunities present themselves. On the other hand, swing trading gives traders less screen time and flexibility.
It’s worth mentioning that there’s no evidence suggesting that swing trading is more profitable than day trading or vice versa. Profitability depends on a trader. Some traders make more money day trading and others profit better when swing trading. The key to success is to try different methods and see what works best for.
A number of indicators can make it easier for traders to place successful swing trades. Some of the most frequently used indicators in swing trading include:
- Moving averages – Swing traders use moving averages to smooth out erratic price data. The crossovers between short-term and long-term moving averages can indicate momentum changes. When a fast-moving MA crosses the slower one from below, this can indicate a coming bull run. When the faster MA crosses the slower one from above, this can indicate a coming bearish run
- Stochastic oscillator – Stochastic oscillator measures price momentum over a 14-day period on a scale of 0 to 100. Stochastic values over 80 send out overbought signals, while values below 20 indicate that a pair is oversold
- Relative strength index (RSI) – Similar to stochastic oscillators, the RSI uses a 14-day period to send out overbought/oversold signals on a scale of 0 to 100. The key difference being that the RSI compares positive and negative closing prices, instead of the highs and lows shown by the stochastic
- Volume – Trends with higher trading volumes are stronger than those with lower volumes, which is especially useful in swing trades that use a breakout strategy. The consolidation points are characterized by lower volumes, which can indicate a coming breakout
- Ease of movement (EOM) – The EOM is a line plotted on a price chart that shows the relation of price action to trading volume. When EOM is positive, it means that price increases are easier during the period, and vice versa
Important events in fundamental analysis
A certain shortlist of important events can help traders identify and map out the release of data that considerably affects the market. These events are, but are not limited to:
- CPI and inflation data released by governments
- Consumer sentiment reports and outlook
- Interest rates and scheduled alterations (which directly affect the rollover fees charged on swing trades)
- Trade data updates and changes from comparable periods
- Internal and external debt data and budgetary surplus/deficits
Patterns to look for
Much like other forex strategies, swing trading can take advantage of easily identifiable pattern formations on the market – such as:
Triangles – triangles are very common. Traders enter when price breaks out and place stop loss behind trendline that was breached.
Falling Wedges – Used to identify continuations or reversals. In this example, the pattern is continuation as price breached a trendline upwards. If the opposite was the case, the pattern would be reversal.
Pennants – are created in fast moving markets and continue trends.
Pros and cons of swing trading strategy in forex
Much like any other trading strategy, wing trading comes with its unique features, pitfalls and pros and cons. Traders need to carefully consider these factors to decide whether swing trading is the best course of action for their trading objectives in forex.
- Swing trades do not use very short time frames, which increases the flexibility for traders and reduces stress associated with rapid decision-making
- Swing traders benefit from long term trends that form on the market, which are characterized by alternating price momentum and frequent retracements
- Swing traders do not need to be glued to their screens all day and they have more flexibility than day traders
- Technical indicators can be more reliable in swing trading, as they use appropriate time frames, such as the 14-period frames used by the stochastic oscillator. Swing traders experience less market noise.
- Rollover fees can accumulate if the swing position continues for extended periods, which can be an additional cost born by traders
- Currency pairs used in swing trading carry fundamental risk, such as changing interest rates, consumer sentiment reports, GDP changes, etc.
- Traders can miss out on long-term trends by exiting the market early
- Requires more planning and more time to find trading opportunities
Example of swing trading strategy in forex
To better visualize the use of indicators in swing trading, we can look at the swing strategy example.
Using the RSI, we can mark buy and sell signals on the price chart. Buying and selling points are in line with some of the lowest and highest points visible on the RSI.
The latest buy signal toward the tail end of October shows an RSI of over 50, which represents a short buying window before the pair enters the overbought territory of 70. Traders can place a stop-loss near this point to limit downside and take advantage of the price as it enters the 70 RSI territory, where traders can sell and lock in profits.
FAQs on swing trading strategy in forex
Is swing trading strategy stressful?
Swing trading does not require constant monitoring of the market, and the bulk of the work is done while gathering fundamental information about which currency pair to place trades for. Using stop-losses and take-profits can significantly reduce stress levels for traders when swing trading.
What are the costs of swing trading strategy?
Swing trading can be quite cost-effective and depends on the size of positions held by traders and the number of hedging tools used to reduce risk. Although it may be very little, the main cost of swing trading is rollover swap fees that accumulate for keeping positions active overnight.
How much money do you need to implement swing trading strategy?
It depends on the trader. For some traders, earring 500 USD per month is a lot of money. While for others, it’s 5,000 USD. The more money you wish to make, the larger your trading balance needs to be, however, it’s critical your trading strategy to be profitable. In general, swing trading needs more capital than day trading, as day traders place more frequent orders and their risks per trade can be smaller.