Forex swing trading is a medium-term trading style that aims to profit from trends or larger price swings in the market, hence the name “Swing Trading”.
Swing trading is well-suitable for the Foreign Exchange market since good trends develop often and this is also why this trading style is very popular among Forex traders.
Generally, swing traders hold positions for 1 – 2 weeks, but in practice, trades can last anywhere from a few days up to a few weeks and sometimes even a few months.
Most swing traders are also trend followers, meaning they generally look to join already established trends. Swing traders will usually look at both long-term and short-term charts and seek to combine the analyses of the two in order to draw valuable concussions and generate trade ideas.
Important aspects for successful Forex Swing Trading
Have a balanced and solid trading strategy
Finding a good swing trading strategy is different from finding a good scalping or day-trading strategy.
A good swing trading method usually will be also based on fundamentals to some degree. After all, trends in the Fx market are most often driven by underlying fundamentals, especially on larger timeframes which is what swing traders trade on and aim to catch.
Successfully swing trading Forex is not just about finding a good mechanical strategy. In fact, a good thorough analysis will go a long way in helping the Swing Trader to be and stay profitable.
Thus, it’s important to focus on solid trading principles such as support and resistance, momentum, and chart patterns. Multitimeframe analysis also plays a large part in generating swing trading opportunities with larger timeframes being used for spotting a good setup and lower timeframes being used for triggering a trade.
Understand the basic fundamentals that drive currency moves
Understanding the main fundamental drivers such as central banks, inflation, economic growth, and sometimes geopolitics and the overall sentiment in global markets is also an important aspect to pay attention to as a Forex Swing Trader.
If a central bank is in a rate hiking cycle then it will hardly make sense to sell their currency (that is unless other big factors are working against it). Generally, if your intention is to capture larger swings in the Forex market you will need to understand the basic mechanics that drive these trends, and in most cases those are fundamentals.
Luckily, there is no need to be an expert in economics or anything like that, but a basic understanding of the fundamental market forces will assist any Forex trader to achieve better results.
Filter out the noise
One of the first goals of every trend trader is to differentiate the temporary corrections from the true trend. A lot of these corrections can be rather sharp on the 4-hour or daily timeframe, but in the end, they are just noise.
The art of swing trading is to know how to identify these fake, noise moves and avoid the urge to act on them, either to open a new trade or close an existing one in panic. Most of the time these sharp corrections are reversed just as fast and a larger swing in the opposite (true) direction follows.
You need to have the stomach for it - Psychologically being able to digest temporary moves against your favor
This is a key aspect for swing trading and one that must be understood in order to succeed. With practice and patience, this ability is improved and your confidence in your analysis and strategy will rise.
Staying in the trades despite them moving 100 or even 200 pips against you is important in swing trading because it is not short-term trading after all. The point is to not trade on the day to day noise but in the direction of the larger trend.
Many times such noise movements can be large enough to scare traders off. But, the successful swing trader knows that the move is fake and, he confidently stays in the trade in spite of it. Soon after, the trade turns into a winner.
Pros of Swing Trading
Swing trading allows enough time for other activities. A generally relaxed trading environment is the usual story for a swing trader. These types of traders don’t like to make rushed or pressured decisions, and normally, they are a relaxed type of person.
Swing trading can offer great risk-reward opportunities. While position trading will require huge stop losses and a strong focus on the fundamentals, swing traders are generally more technically oriented and they can normally place more reasonable stop levels. This allows them to place clear stop loss and profit target levels which can often yield excellent high reward to risk trades.
Some people find it easier to catch these more organic market swings than trading the day to day noise in the market or trying to catch the secular trends with position trading. Swing Trading is like the perfect sweet spot between extreme long-term and extreme short-term trading strategies.
Cons of Swing Trading
You will need to hold positions for a while even when moving against you. Therefore you will need larger capital compared to short-term trading styles such as day trading or scalping. Due to the larger average fluctuations in a trade, swing-trading has higher margin requirements and generally one can’t use such high leverage ratios as in short-term trading styles.
Sometimes overnight moves can surprise you. This is another aspect to keep in mind. Swing trading strategies always hold positions overnight and although most of the time the market is calm during the Asian session, sometimes large moves can occur. Having a stop at appropriate levels is necessary to protect yourself from such adverse moves.
Unfortunately, sometimes you will need to take that large loss when you realize that a trade is a definite failure – Yes you need to be prepared for this too. Sometimes the trade that went 100 pips against you, in the end, will turn out to be no good at all and you need to be prepared to take larger losses compared to what short-term traders would normally take. This is the main reason why swing traders are advised to use lower leverage compared to day-traders or scalpers.
Is Swing Trading right for you?
Swing trading could be right for you if you like thinking about things in an in-depth way and If you don’t like quick decisions and being fixated on the computer screen for hours per day.
If you are generally a relaxed person who likes to take his/her time before making a decision then swing trading is probably the right trading style for you.
Swing trading will not be right for you if you have trouble keeping an open position overnight or are inpatient in holding and waiting for a temporary losing position to turn in your favor.