Swing trading on forex
What is swing trading?
Despite the fact that this type of trading has been known for a long time and is described in details by J. Douglas Taylor in his book "Taylor's Trading Technique", this trading method has gained wide popularity relatively recently. Therefore, let us discuss it in details.
So, let's start with the terminology. "Swing" means swing, swing amplitude, swing, rhythm, turn.
As a result of such price swings a profit is made, but the transaction is not designed for a long period. In swing trading, a position usually remains open for no more than five days and even less.
The goal of swing trading in forex is to make as much profit as possible with as little market entry as possible.
If we take a broader look at this question, we will find that the term "to swing" has a certain meaning which is directly related to trading.
On the one hand, it indicates that you should "walk the measured steps" in trading, i.e., take your time and be careful, and, on the other hand, it warns that you can "be hung" and lose everything if you trade unprofessionally.
Based on these tenets, it is clear that swing trading in forex is based on the principle of avoiding unnecessary prolongation of trades. It is believed that it is better to close a trade rather than wait for it to accrue a loss, thus depriving the trader of the opportunity to enter the market from more profitable positions.
Reasons for the popularity of swing trading
1. It is a style of trading where a position is "active" for several days allowing a trader to find the best time to close a trading position and make a profit, or to stay out of the market when it starts to "storm".
2. Swinging is used by many investors in times of market instability to reduce the risk component of trading.
3. Swing trading in forex is ideal for traders whose daily schedule does not allow for intraday trading activities.
Swing trading rules
First of all, it should be said that swing trading is a part of a large market cycle. And if a trader wants to take advantage of its movement and make a profit, he or she should act flexibly, correctly evaluating the current market situation. Depending on this, apply the trading methodology that best fits the current market dynamics. This trading strategy might sound complicated. But time invested will be more than paid off if the details are thoroughly studied.
The following rules should be observed in swing trading:
The volume of trades you open. Since swing trading is not a long-term strategy, and the trades are opened for a relatively short period of time, the volume of the trading position should be such that the transaction can withstand a short-term price correction in the opposite direction to the open position. It is up to the trader to decide on this volume, based on the size of his deposit.
In particular, if volatility of the currency pair fluctuates in the range of 100-150 pips, then it is recommended to open a deal with a volume that can easily withstand correction in the opposite direction of 50-70 pips. The price level, at which stop-loss should be placed, is chosen accordingly.
2. Entering the market. The point of entry into the market according to this strategy is considered to be the price level, at which the reversal and a new trend is outlined. It can be caused by important news publication or notable market depletion.
In order to determine this point, the trader should be able to analyse the market dynamics, apply properly the methodology of technical and fundamental analysis. It is advisable to enter the market when you are sure that the price movement vector has changed and there is every reason to believe that the new trend will not be a short term correction.
3. The duration of an open position. In swing trading it is believed that a trade should remain open as long as it is profitable. The preferred option for closing a trading position is to lock in profits at take profit.
4. Exiting the market. Closing a trading position in a trade using this methodology may be done manually, or as a result of activating stops. The decision to exit the market can be made by a trader as a result of trend reversal signals or news publication, which can cause a radical change in the vector of price movements in the opposite direction to the open position.
Postulates of swing trading
- To open a trading position, a medium-term trend must be identified as soon as it emerges.
- Entering the market is considered correct if profits start to grow immediately.
- If the target has not been reached during the trading day, and profits continue to grow, the decision on the trade should be made the next day.
- A losing trade should be closed, if there is an opportunity to enter the market on more favorable terms.
- If a profit turned out to be larger than expected, it should be closed promptly.
- If the trade turned out to be profitable, but the market shows signs of a trend change, it should be closed immediately. But if the market shows no intention to change the price trend, then one has to learn to wait and take profit at the target level.
Advantages and disadvantages of swing trading
No one needs to be convinced that there is no such thing as a 100% win-win strategy in forex. Swing trading is no exception, and it has its advantages and disadvantages.
The merits of this trading method can be considered:
- Swing trading allows you to earn regardless of the global trend of a particular asset.
- This trading method does not imply a strong emotional load on the trader.
- Swing trading allows you to count on greater profits with less risk compared to intraday trading on forex or scalping.
However, the advantages of this trading method are revealed only when a trader is able to correctly orientate in complicated market conditions and catch its dynamics. Analytical skills combined with intuition (in the good sense of the word) should help traders understand what to do - buy or sell an asset, close a position or wait for the price to reach a target.
The disadvantages of swing trading include:
- Swing trading usually uses a large time frame. The consequence of this will be large stops, which in turn requires a considerable amount of money in the trader's trading account.
- Swing trading requires a certain level of training for the trader. Without the ability to determine the cyclic behavior of price movements and trend direction correctly, it will be impossible to make a profit and correctly calculate the risks.
Who is swing trading suitable for?
Despite the obvious advantages of this method of forex trading, it is not suitable for everyone. Even traders with long and successful experience in the market are not always able to use this strategy effectively.
Swing trading will be optimal for traders
- Those who have enough patience and are able to hold open trades for several trading days;
- Those who believe that you should make money not as a result of opening a large number of trading positions, but as a result of high-quality market entry and timely completion of the deal;
- Know how to work with stops placed at a considerable distance from the entry point;
- remain calm in situations where a trade is not successful.
Swing trading should never be used by traders
- who use active trading techniques;
- traders with low patience thresholds who want to see their trading results as quickly as possible;
- Irritable and prone to nervous breakdowns - especially when trading is not going the way you want it to;
- lacking the ability to analyze market developments on a daily basis.
To sum it up, it should be noted that swing trading may not be used by all traders. But those traders who are willing to study its peculiarities thoroughly, take time and learn to catch market moods and market movements this forex strategy will enable them to earn good money.