What is Swing Trading?
Traders and Investors try to make money from the Forex Market using different trading strategies. Some are looking for long-term investments while some are looking for quick gains. There are a variety of different trading strategies to start with, Swing Trading is one of the most suitable for Beginners.
Swing trading provides ample time for execution. The chart time frames are relatively longer than those used in Day Trading and Scalping Trading. This strategy gives a great opportunity for newcomers to understand Forex Trading and Market Movements.
How Swing Trading Works?
Swing trading is relatively a slow-paced technique compared to others. Generally, you are holding to your trades overnight and it can lead to holding the securities for days, weeks, or months. The traders are looking for strong directional movements in the prices to make good profits.
Swing traders utilize technical analysis as a major part of their decision-making process. It is one of the Trading strategies where the traders also consider the fundamental analysis of the securities as well. Traders predict future price movements by analyzing the Chart Patterns. The traders are looking for strong trends and reversals for entering into the traders.
High-volume currency pairs and securities are more suitable for swing trading. High-volume traders provide high liquidity making entry and exits quicker. Currency pair trading with high volume is more likely to move in trends. These trends provide the opportunity to hold the trades for sessions in upward or downward directions.
High volatility is another factor that is considered before choosing any currency pair or security for swing trading. Usually, high-volatility currency pairs are not suitable for Swing Trading. High volatile currency pairs can stay in range-bound sessions for longer times. An instant dip in a highly volatile currency pair can cause the stop loss to hit often. If stop losses are placed wider on highly volatile currency pairs the loss can accumulate over time if the trading strategy is not performing well.
Strategies for Forex Swing Trading
Earning good profits in the Forex Market without a Trading Plan is not easy. Holding positions overnight has its risks. It is very important to develop and back-test different strategies for Swing Trading.
You should analyze the strategies on Demo Accounts and compare the results of different plans executed. Discipline and self-control are necessary for the execution of trades based on Swing Trading Strategies.
Below is the list of indicators and techniques that can be utilized alone or combined with other indicators/trading setups to develop a profitable Swing Trading Strategy.
- Channel Strategy for Swing Trading
The prices of currency pairs move in trends, sometimes the trends are stronger and sometimes weaker. The prices start to move in Channels when the trends become stronger.
For Example, if a currency pair is moving in an Up trend for a couple of sessions it can form an upward channel. The prices can bounce from the Channel Support multiple times.
When a currency pair is trading within a trading Channel, it can provide opportunities for profitable swing trades.
Reference to the below chart, where the prices are moving in an uptrend channel. A trader can buy the currency pair when the prices bounce from the lower support line of the channel.
Reference to the below chart, where the prices are moving in a bearish trend. A trader can sell / short sell when the prices bounce from the upper resistance line of the trading channel.
- Moving Average Crossovers for Swing Trading
Swing Trading Strategies can be developed by using multiple simple moving averages or exponential moving averages. The moving averages cross-overs are used as a reference point for the entry and exits of trades.
For Example, let us consider you are using a 10 Moving Average and a 20 Moving Average. When the 10 Moving Average crosses over the 20 Moving Average a buy signal is generated. This crossover of the moving average is a signal of an upside swing.
Whereas, when a longer moving average crosses above a shorter moving average it is considered a sell signal. Traders short-sell the currency pairs for a bearish swing.
- MACD for Swing Trading
For Swing Trading MACD crossovers are frequently used by traders. The results of MACD crossovers are good on longer time frames.
For shorter time frames MACD crossovers can be complicated. There can be false buy and sell signals generated by MACD crossovers in shorter time frames.
Consider the below chart, there are two ways the MACD cross-overs can be used. First are the signal line and the MACD line. For a bullish swing trade, the MACD line should cross above the signal line.
While for the bearish swing trade, the MACD line should cross below the signal line.
The second signal for swing trading generates when the MACD oscillators cross the zero line.
When the MACD oscillator is above the zero line, it is a bullish trend. When the MACD oscillator crosses the zero line from above then a bearish trend signal is generated as shown in the below chart.
- Fibonacci Retracements for Swing Trading
Swing traders can develop a strategy by using Fibonacci Retracements. It is an excellent indicator to detect the support and resistance levels on the technical charts. The prices can bounce back from the support and resistance levels. This bouncing back of prices from key levels can lead to trend reversals.
- Using Support and Resistance for Swing Trading
Support levels are the levels where the traders feel the prices have reached very low and cheap. The traders try to buy back the currency pair immediately building momentum and causing the prices to go up. The prices should bounce back from the point multiple times in the past to make strong support.
Whereas resistance levels are the prices where the trades feel the prices are on the higher end and lose their interest in more buying. This causes the prices to go down from that level. The prices should go down from the level multiple times in the past to make a strong resistance.
Traders can use strong support and resistance levels to identify the setups where the prices can bounce back. These setups combined with other indicators can make up a profitable Swing Trading Strategy.
Benefits of Swing Trading
- Trading Cost
Swing Traders are trading fewer trades as compared to Day traders and Scalpers. The overall cost of brokers due commissions and spreads is usually less due to fewer trades.
- Market Research & Strategy Development
Due to fewer trades and longer time frames, Swing Trades have more time to research the market. They can analyze and back-test their strategies due to the time freedom.
- Flexible Trading Style
Swing Traders are holding their positions for days therefore they are not affected by small dips on the minute charts. Eyes are not glued to the trading terminals every minute.
- Fundamental Analysis
Fundamentals play a major role in the price action of Forex Currency Pairs. Fundamental analysis can be effectively used in Swing Trading Strategies for accumulating profits.
- Part-Time Trading
Swing Trading Strategies are excellent for part-time traders. It provides the freedom to choose your time slot for trading. It is not necessary for traders to constantly monitor the trading terminals.
Drawbacks of Swing Trading
- Profit Accumulation
Profit is generated when a trader closes a trade. If the trade is open it can be in profit but it is useless until the profits are transferred into your account. Swing trading is slow which makes profit accumulation slower. Moreover, profit is also not compounded quickly as in the case of Day Trading.
- Market Gaps
Due to any unpredictable news that can be political or any tragedy the markets can open with a Gap. These Gaps can cause a dip and losses immediately. By keeping the positions open for days, you are prone to Market Risks.
- Slow Results
The results whether in profit or losses are not immediate. If you have an urgency and a reactive nature then this strategy is not for you. It requires a cool and calm person who can manage a trade for sessions to be a good swing trader.
Swing trading is an excellent strategy for new ones who are planning to trade. The biggest advantage is the time freedom which lags in Day Trading. You can spend quality time on your research to make your strategy better.
Over-trading is a big problem for Forex Traders. Some traders have a habit of constantly looking at the price charts for long periods. By using a Swing Strategy you can control the over-trading habit. You can stop yourself from constantly looking at the charts by applying proper stop losses and profit limits.
The profits in the Swing Strategy can be slow but over time these slow profits start to accumulate. Traders can start a stable source of income from Swing Trading. Once a steady income source is generated through a Winning Strategy, a trader can earn money by just spending a few hours a week.