What is Forex Swing Trading?
Forex swing trading is a style of trading that aims to capture profits in the Forex market by holding trades for a period of time ranging from over a day to several days or weeks. This is distinguished from the day trader who seeks to get in and out of the market before the end of the day. It also differs from long-term traders who hold on to positions for periods ranging from several weeks to months or a year.
What are the Advantages of Forex Swing Trading?
Some advantages of Forex swing trading include:
Cheaper in fees
As compared to a day trader who opens several trades in a week, a swing trader may open only one or possibly two. That means that swing traders pay a lot less in spreads since they only pay it for one or two trades per week.
More time flexibility
With day trading, you need to pay constant attention to the market to find those opportunities for profit each day. With swing trading, you don’t need to have your eyes constantly glued to the market. You can also be more patient and wait for good trading opportunities to present themselves with no necessity of rushing it and making a bad move.
Lots of indicators available
The timeframes that swing traders usually work on, the 4-hour, daily and weekly charts are long enough so that technical indicators truly have some significance. The Moving Average Convergence Divergence (MACD), Exponential Moving Average (EMA) and the Parabolic SAR are some examples of popular swing trading indicators.
What are the Disadvantages of Forex Swing Trading?
Some disadvantages of Forex swing trading include:
Less trading signals
As swing trading involves using the higher timeframes, valid trading signals can be few and far between. This means that swing trading will require patience and discipline, just like any other forex trading strategy.
More time to compound account
As swing traders only take a handful of trades, it can take some time to build up the account. Thus, those who are trading modest lot sizes will have to be patient before they see their account grow.
Forex Swing Trading Strategies
Trading with the trend is a popular swing trading strategy. An uptrend occurs when a market produces higher highs and higher lows, while a downtrend is defined by lower highs and lower lows. Once we have identified a trend, we then wait for a pullback in the opposite direction. Then we wait to see if this pullback fizzles out and the market returns back in the direction of the larger trend or if the pullback becomes a genuine countertrend. The swing trader then looks for a signal that the pullback is about to come to an end. This could be a trend termination signal like doji, falling hammer or hanging man candlestick patterns. Or it could be a double top or falling wedge pattern. When the swing trader has this reversal signal, he or she enters the market in the direction of the larger trend. If the interpretation of the market is right, the larger trend will resume and profits will follow.
Trading Against the Trend
This strategy is similar to trend trading except that while waiting to see if the pullback will fail and the larger trend will resume, the trader comes across a signal that suggests the strength of the pullback will form into an actual countertrend. Catching a trend reversal at the top or bottom of an old trend can be very profitable. If a new trend actually does begin, it may not reach that peak or valley of the old trend for weeks or months. There are many trend termination signals, but the only way to really decide that a new trend has started is by confirming its strength through a MACD or EMA crossover, or by the pullback reaching a particular Fibonacci level. Some traders prefer to set a take profit, while others do not. This allows the profits to run. Trailing stops are good for letting your profits run without letting them pull back too much.
Example of a Swing Trading System
A trading system is a sort of algorithm, or series of steps, written out for a human to follow. For this example, we will illustrate a trading strategy called the Floor Traders’ Method. This trading strategy can actually be used for traders of any timeframe. Day traders would just need to use it on a 15-minute chart. Swing traders will see the best results using hourly, 4-hour or daily charts.
- Set up an EMA with 9 periods and an EMA with 18 periods. When the EMA9 crosses over the EMA18, you have an uptrend. When the EMA9 crosses under the EMA18, you have a downtrend. Make sure both EMAs are pointing in the same direction before calling it though.
- Wait for three bars to trade below or above the moving averages (whichever direction you noticed the trend in step 1).
- Wait for the price to come back and touch either of the EMAs.
- Once a candle has reversed back beyond the extreme of the candle before the touch, enter the trade in the direction of the trend. Set the stop loss beyond the touched EMA line.
Forex Swing Trading Conclusion
Forex swing trading is a great compromise between the fast-paced action of day trading and the slow, methodical pace of long-term trading. Your weekend risk is limited compared to the long-term trader and you don’t have to constantly babysit the market as day traders must. Trading with a trend or against a failing trend are popular strategies for swing traders.
The methods of implementing a swing trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice forex swing trading, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.