- What Is Forex Swing Trading
- Advantages Of Forex Swing Trading Strategies
- Disadvantages Of Forex Swing Trading Strategies
- Best Forex Swing Trading Strategy
- Forex Swing Trading Techniques For Risk Management
- The Best Instruments For Forex Swing Trading
- Tools For Forex Swing Trading
- Pro Tips For Swing Traders
Having a plan is crucial to successful foreign exchange market experience. Taking some time to consider the outcome of each step and learning something new every day are the qualities of a profitable Forex trader. But with the widespread variety of options it can sometimes become tricky to choose which path to take.
There are many approaches to making money on Forex. Some of them require minimum effort and some are complex and time-consuming. Some can be mastered in a matter of several hours and others will take literal months to get perfected. Swing trading is somewhere in between. While Forex swing trading strategies do not take up your entire day, they cannot be taken lightly.
Today we will talk about everything you need to know about modern swing trading and discuss the best Forex swing trading strategies in 2020. In the post we will discuss the following:
What is Forex swing trading
Advantages and disadvantages of Forex swing trading strategies
Most effective swing trading strategies
Risk management techniques in swing trading
Best tools and instruments for productive and convenient swing trading
Pro tips for swing traders
What Is Forex Swing Trading
Forex trading strategies mainly differ on the amount of time spent on a single trade. Based on this traders will use a specific timeframe for their chart and implement appropriate trading and risk management techniques. Choosing the right strategy for yourself also largely depends on the amount of time you have on hand to actually trade. From which we can draw to a simple conclusion: no matter how busy you are with your other tasks, there is a strategy for everyone.
Now, with that said, fast on Forex does not necessarily mean easy. As an example let’s take the shortest of the trading strategies - scalping. Scalpers focus their attention on getting extremely small profits, sometimes just a couple of pips. Each trade they hold lasts for anywhere between a few minutes and a couple of hours. The general idea is to gather as many as possible of multiple small victories and have them accumulate into a visible profit.
On one hand, this is a great solution for those who have full-time jobs or other time-consuming commitments. Just the thought of trading for only a couple of minutes and achieving a profit as a result sounds rewarding. But there is always a but.
Surely, day trading only takes a few minutes each day for many traders, but it requires just as much planning as any other Forex strategy. Because to know exactly when to execute a winning position, a trader needs to know what factors lead to the current market state and what will be happening next, even if it is just a question of mere minutes. That is why it is widely suggested that scalping should only be attempted by experienced traders who have a good understanding of how random and aggressive the market can be. Additionally, a nerve-wrecking strategy like this one will require an exceptional level of self-discipline when it comes to risk management and exit planning.
Next after scalpers, there are day traders - market participants who hold their positions open during the period of one day, avoiding carrying traders overnight. Day trading is still very fast-paced, but it allows for some room to breath. The big downsides for day traders are the amount of undivided attention it requires and, just like with scalping, the effort needed to learn and master the day trading skills.
On the entirely opposite side of the timeframe spectrum there are long term traders, who might sometimes hold a position open for weeks and even months. The clear advantage of this approach is the peace of mind, as the traders are not affected by volatile fluctuations in the chart. They slowly continue moving towards their goal, that they previously forecasted themselves, and they have plenty of time to stop and gather profits, if the situation starts going south.
With all the attractiveness of this seemingly hustle free approach, long term trading is mostly suitable for those, who do not rely on Forex as their significant source of income. So if you want to see the results sooner than in a few months, long term is probably not for you.
This brings us to swing trading - a golden middle between day traders and long term traders. The swing traders are not limited by a specific period of time - a single position can stay open for a couple of days anywhere up to a few weeks. Major focus is on swings - chart formations from an extreme low to an extreme high, disregarding all the minor fluctuations between them.
The volatility of the market results in an increased amount of price value movements that all ultimately lead to an extreme high or low. And the more movements there are the bigger is the body of the swing and with it - the profit of a swing trader.
In a nutshell, swing trading focuses on time frames between H4 and D1, combines technical analysis with fundamental and sentiment analysis and pays close attention to the volatility of the market. To simplify the swing trading logic - a trader identifies the trend, wait for a retracement to enter and then profits as the trend continues on going. This applies to both uptrends and downtrends, as we know that on Forex you can equally benefit from any direction of the price. Next we will go over why so many traders choose swing trading as their primary trading strategy and where would you want to start if you decide to implement it.
Advantages Of Forex Swing Trading Strategies
We have already briefly mentioned that swing trading is extremely popular among traders, who are comfortable with volatile market environments and like to see the results of their trades sooner rather than later. Let’s get slightly more specific and go over the advantages of swing trading strategies above others:
Variety of supporting tools. Both day trading and scalping are very specific which makes them sort of narrow in terms of supporting instruments. The swing traders fit into a wider category and therefore have a solid amount of handy implements. For example, the majority of technical analysis indicators work their best on medium-sized timeframes, such as H4, D1 and W1. This is simply explained by the fact that they get the reasonable amount of data to work with, yet not too much to get overwhelmed with it. Additionally, the analysis of larger time periods, compared to the one on smaller ones, is far more detailed and comprehensive, which helps the traders build a more detailed action plan.
Cost efficiency. Setting aside the actual investment amounts and the overnight swap charges, the trading process can still be very costly due to spreads. Spread is a difference between the ask and bid price that gets charged each time a trade is made. Fore scalpers spread can sometimes be more than the profit they made, which makes the whole process pointless. But for swing traders, on the other hand, the spread does not play much of a role. This is again explained by the fact that each trade is stretched out and the profits are gathered from a large distance between two price values, which means that a few pip worth of spread charge will not affect the account balance at all.
Time efficiency. It takes less time for swing traders to do all trading related tasks, including: analysis, risk management and the actual trading itself. The nature of swing trading is more observant than action based, as the traders wait for a full swing to take place. Plus, with a set of additional tools designed to predict the next retracement, a trader can plan the process calmly and use the extra time to strategize through each step. You might argue that long term traders have a similar luxury of time, but in their case a lot of energy goes into analyzing the market far into the future, which can be both stressful and time-consuming. Not to mention the actual trading process for swing traders takes up no more than 10 minutes per trade.
All of the above make Forex swing trading strategies the ideal solution for new traders. The efficiency measures distance between every action provides plenty of room to gather the thoughts and focus on the big picture, while still making visible profit. However, just like any other strategies there are several disadvantages to swing trading that might become a potential obstacle.
Disadvantages Of Forex Swing Trading Strategies
First on the list is more of a difficulty than a disadvantage. We are talking about the learning process associated with profitable swing trading. Each and every strategy for Forex trading requires a certain level of preparation and skill. Even when it sounds easy enough to follow, chances are there are things that might complicate the process. That is why getting to know all the ups and downs of the strategy you are planning to use is crucial. One of the best ways to do that risk free and at your own speed is by setting up a demo account for Forex trading. Demo accounts exist for the sole purpose of letting traders from all kinds of backgrounds polish their skill, experiment with various strategies and find the right combination of techniques to later use in the actual trading process. Learning about all of the technicalities of swing trading and giving them a go in the demo mode at the same time can significantly speed up the initiation process and get you to the results part sooner.
Apart from some execution complications, swing trading can also be affected by fundamental factors. It is true that the Forex market is driven by traders, but what drives the traders themselves. In the majority of cases volume produces more volume and the driving factor is the price movement itself, but it is also very common for various political and economical events in the world to affect the way traders act. The biggest threat for a swing trader are the events that happened over the weekend, when the market is inactive. Once the trading world “wakes up” in New York, a wave of reactions floods the market. And sometimes it can go in the opposite direction from the previously ongoing trend, giving swing traders a very insignificant opportunity to pull out before it is too late.
We have already mentioned above that swing trading can be considered cost effective due to the lack of exposure to spread charges. But there are also swap fees that we briefly covered as well. For the traders who hold their positions open within one day, swaps will not mean anything, but in case you need to carry a certain trade over to the next day - a swap fee will take place. Swap is a process of closing and immediately reopening a position to roll it over to the next day at the market. The swap can either be fixed or occur at the current market price, which is not always beneficial for the trader. So, when a swing is taking its sweet time to reach the desired point, swing traders need to consider the accumulating swap charges that will slightly take back from their ultimate account balance.
At this point we have a good view of how swing trading strategies operate in general. It is time to get a bit more technical and talk about the exact methods that can be used in swing trading. In the upcoming segment we gathered the most effective and popular, in our opinion, swing trading action plans in 2020.
Best Forex Swing Trading Strategy
In case you have never used a trading strategy before, the best way to describe it is a set of steps and instructions to achieve certain results through trading. Trading strategies can vary on a number of factors including: the sizes of traded lots, the amount of trades per day, the particular tools used in the process, the implemented risk managing techniques and more. Strategic trading is always guaranteed to bring better results than a random approach, because one of the main qualities of a successful Forex trader is consistency. Knowing exactly what you are doing and why is the wisest approach to pretty much any area of life, but it is especially important when money is in question. Below are three most popular approaches to swing trading:
Trading along with the trend. The price chart is always moving and if you look close enough, you can see that it does not move in a straight line. Each chart is constructed with nearly equal amounts of bullish and bearish elements and together they form patterns that signal different situations. To identify a trend the trader needs to look at the bigger picture rather than the exact parts of the graph. Trend is a scenario when each high is followed by a higher one or each low is followed by a lower one. If we take a look at the candlestick chart, we can see that sometimes trends consist of the same type of candles going one higher than the preceding one or vice versa. And then sometimes between the two highs or two lows there is a certain amount of pullbacks from the opposite side of the market.
Swing traders are looking to capture and use the short trend - a segmented part of the chart that has satisfactory distance between the key points. The entire trend can be going on for several months and while swing traders are looking to make the most out of the trend, they do not wish to wait too long and choose to profit off the swings. It is common for swing traders to set up a stop loss but keep their take profit open or dynamic. This way, adequate risk management is at place and there is no specific limit to which a price should run to. However, it is strongly advised to still plan an exit strategy rather than keep chasing a high candlestick after candlestick.
Trading against the trend. This type of swing trading is still trend oriented, only it requires the trader to go in the opposite direction. If trend trading allows us to profit from the overall volume of the trend, counter-trend methods are more focused on the pull back part of the process. As we have already said, the chart is not a straight line and every high is usually followed by a low, or vice versa. And since everyone can benefit from Forex, both selling and buying, it is entirely possible to gather profits by going against the trend.
Counter-trade trending is more strict in terms of self-discipline. Going in you have to have a clear vision of where you will enter, how long you will keep in and where you will exit. In the ongoing trend, retracements can be very short and capturing their exact moment can get quite tricky. That is why it is best to implement this approach on trends that have deeper, more significant pull-backs, which allow enough time to react.
Fibonacci retracement. Fibonacci levels can be used as a separate strategy and as a supporting tool for an existing trading method. Through the preset mathematical algorithms a trader can find both the levels of support and resistance and also calculate how long a retracement will last. For swing traders of all types the significance of the retracement is all that matters as on trend traders use that period to enter the market and the counter-trend traders manage to open and close through that rather small segment.
Trading with Fibonacci tools is not rocket science, but it does require a certain level of understanding and skill. Start by getting to know the logic behind this type of calculations first and then try to implement the usage of the tools in the demo account to get a good feel of manipulating those instruments.
The three examples above are just a few of many strategies available in the swing trading category. To choose the right one for yourself, evaluate your abilities and experience and do not hesitate to take some extra time to read about the matter and practice a little more. Now let’s talk about risk management techniques you can implement during any of the swing trading strategies to ensure you are getting the most out of each trade, while still acting wisely and rationally.
Forex Swing Trading Techniques For Risk Management
Risk is an inevitable part of the trading process. Of course, taking risks might seem intimidating and unnecessary, but the success on Forex is simply not possible without them. The real job of a trader is not to avoid risk at all cost, but rather tame it and turn it from a raging lion into a purring kitty.
Risk management is very much the same for all types of strategies, but today we are looking at the specific measure to take from the swing trading point of view. Here are the most important risk managing techniques to include in your swing trading process:
Keep it simple. Trader’s biggest enemy is greed and mastering over your very human emotions is a great task. One way to minimize the risk of getting carried away by an unpredictable market is to set specific limitations to each of your actions. For example, learn to walk away when the market seems to play against you. Or learn to find the right moment to stop, even if everything is going according to plan and exceeding your expectations. Set rules and follow them religiously, no matter what the situation is.
Keep it short. It is generally a good idea not to keep your trades open overnight for several nights in a row as well as not to carry them over the weekend. We have already talked about the morning news from New York slapping a slightly more Eastern trader in the face when they get to the market. Time zones play a big role in how the thing unfolds and closing a position before leaving the market for an extended period of time might be the best solution. Unless, of course, you are a time traveler and know exactly what is going to happen next.
Keep your mind clear. For Warren Buffet losing two thousand dollars will not cause a significant drop in his budget, but for someone whose yearly income is less than 6 figures - it can be a big deal. That is why the key to any strategy in terms of risk managing techniques is to calculate how much you are willing to lose painlessly. This does not mean that you will absolutely have to say goodbye to that amount, it just means that you won’t be eating ramen noodles for the rest of the month if the market plays a trick on you.
Keep it diverse. Portfolio diversification can serve a number of purposes, such as: smarter approach to investing your assets, covering all fronts for all types of scenarios and of course having an ability to switch between several instruments to always remain on the winning side. A diverse portfolio on Forex is a set of currency pairs that are not directly related to each other. For example, switching between USD/GBP and GBP/EUR is pretty much staying in the same pool, although it can also be a good idea at times. But if your USD/GBP is acting up, changing to EUR/JPY might refresh your vision and bring a whole new perspective to your strategy.
Keep it rational. At the end of the day the strategic approach is individual to every trader and so is risk management. The best thing to do is go with what you are comfortable with and evaluate each victory and loss equally. Some traders are completely fine with going all in, while others are keeping it at 1:2 ratio and prefer the slow and steady approach. Both are right as long as you are staying profitable.
We are going to take the next couple of minutes to talk about the exact tools and instruments that can be considered the most suitable for swing trading.
The Best Instruments For Forex Swing Trading
The word “instruments” on Forex is mainly used to refer to currency pairs. After all, currencies are the main focus of the foreign exchange market. However, while all world currencies have a right to participate in the trading process, not all of them are equally popular.
There are several currency pairs that are considered the royalty of the Forex market as they are usually controlled by strategically important governments. Those currencies include the US dollar, the Euro, the British pound and the Japanese yen. The phenomenon of their significance is that the volume caused by the importance of their presence in the world of finance is backed up by the interest of many traders. And that interest causes even more volume, making the mentioned currencies virtually indestructible. But it is also true that most major pairs tend to stay around the region of medium volatility, due to the economic back-ups.
We have already established that volatility is a very important factor for successful swing trading. Because for a really good swing there needs to be enough attention from traders of both sides - bullish and bearish. Volatility is directly related to volume and that is why swing trading with the least popular currency pairs is not a very good idea.
The most volatile major pair is GBP/USD and GBP is also a part of the most volatile cross pairs - GBP/CAD, GBP/NZD and GBP/AUD. And the most volatile exotic pair is USD/SEK with its average volatility count above 600 pips.
Choosing the right set of pairs to trade with depends on a variety of factors, including: your physical location, your knowledge of certain government's economy and politics and your preferences in terms of volatility. The rule of thumb is to start with one or two of the major pairs and then experiment your way into a couple crosses and one exotic pair. Once again - trying them out in demo mode is always a smart move.
Tools For Forex Swing Trading
The most important tool for any modern online trader is the trading platform. This is where all trading related transactions take place, including analysis of the market, strategizing, asset management and actual trading. While having a PC version of the platform allows you to see the bigger picture and perform more in-depth analysis, it is also a good idea to have access to the portable version of the trading software.
A great solution for taking your trading process on the go is the MT4 app that has an available version for all types of smartphone operating systems, including iOS, Android, Windows and more. The app will allow you to keep up with an open position, even if you have to be away from your computer. This is very convenient for swing traders, who choose not to set up pending orders and like to act on the spot. MT4 app will provide you with an opportunity to access the charts, perform all basic tasks and run simplified analysis. And if you choose to get an application for a tablet - the analysis option spreads out to nearly full size.
Additionally, a profitable swing trader will have to master the usage of several trading indicators that focus on trend identification and confirmation. The most important indicators for swing trading analysis are the Moving Average (MA), the Moving Average Convergence Divergence (MACD) and the Relative Strength Index (RSI).
MA is ideal for outlining the trend by disregarding the minimal noise. It looks like a line that goes through the chart connecting the average points throughout the chosen time period.
MACD is based on the same logic as MA, only it also takes into consideration things such as momentum, strength, direction and strength of the certain trend. Having access to this data allows traders to better identify best options for entering and exiting the trades.
RSI is often used to re-confirm the data, calculated by MACD and determine the best entry points. This indicator is ideal for oversold and overbought market conditions.
As we are now coming to the conclusion of today’s discussion, let’s briefly go over a few professional tips for traders who are considering implementing swing trading strategies or are just in the beginning of their swing trading experience.
Pro Tips For Swing Traders
Just as with the risk managing techniques, a lot of professional suggestions for swing traders can be applicable to other approaches as well. However, here we have gathered the most specific tips that can be used by both beginners and professionals.
Try your best to stay calm. Volatile markets can be stressful and the anxiety doubles when money is at stake. But a nervous trader is an irrational trader and you need to try all of your resources to look at every experience as an opportunity to learn from, not as a victory or a loss. There will be time when you will feel like there is no hope, but on Forex, as we have already mentioned, every up is followed by a down and vice versa. You just need to be patient and as peaceful as possible to keep your focus and achieve desired results.
Consider using leverage. A small leverage is a wonderful tool for anyone who trades on shorter timeframes. Having an opportunity to double your profits is definitely encouraging. One thing to keep in mind is the appropriate calculation of the leverage ratio you will need in your trading. Perhaps the best option is to discuss the available options with your broker and choose the right fit by following suggestions specific to your situation.
Always look out for the big picture. Swing traders often get carried away by sectioning out the smaller portions of an ongoing trend and that leads them to miss out on larger opportunities. Whatever your strategy is, it is always good to “zoom out” and see a bigger timeframe. More often than not a trend appears more significant from the further perspective and can provide the trader with much more beneficial trades than expected.
Perform your own market analysis. This one is for the expert traders out there - after you become comfortable enough with trading, start learning about different aspects of both technical and fundamental analysis. Having your own opinion about the ongoing trend can sometimes play a big role in one’s trading career, especially if this opinion is shared within the trading community. Sometimes, even if a certain opinion seems hard to believe, it picks up and becomes a trend just because of the amount of following traders, who trust the experienced trader. And as we know, in swing trading traders’ attention is crucial.
Trade bigger amounts. To get to the desired amount sooner, a trader has to consider depositing a bigger amount. Bigger lot sizes bring higher profits. And the risk associated with trading more money can be managed by one or several techniques described above. Just remember to stay rational in terms of how much you can afford to trade with and how fast you would like to earn.
What Is Forex Swing Trading: Final Thoughts
Swing trading can be very profitable and it is also considered one of the best paths for beginners. Swing traders get the right combination of time, spent trading and visible results. As long as you keep the right mindset and remember to learn, practice and experiment for as long as you participate in Forex trading - profits will come around sooner or later.
In the meantime, continue learning about various Forex trading strategies and testing them out in the conditions of the real market through your trading account or in demo mode, for risk free practice.