Forex Swing Trading

What is Forex Swing Trading & How to Find Good Setups

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Swing trading is perhaps the trading style that is most relevant to beginning Forex traders. At the same time it is also being widely used by big professional traders. Many swing traders use this approach in combination with day trading or other Forex strategies, in order to have different trading styles for different timeframes.

A swing trader attempts to predict the typical “wave moves” you can see in stocks, indices, commodities or Forex pairs. Investopedia defines swing trading with a holding period of 1 to 4 days. In the Forex market, a typical swing trade happens within the trading week between Monday morning and Friday night. The reason is that many traders prefer to hedge the risk of having open positions during closed market in weekends.

What is a Swing in Forex

The market price of a currency is always the equilibrium between supply and demand. This means that buyers and sellers have agreed on the price and conducted a trade.

Forex Market Equilibrium

Prices can over time move in uptrends and downtrend, or move sideways within a trading range. Markets usually move in a pattern of “range contraction” or consolidation. This is followed by “range expansion,” where price breaks out from the trading range and moves to a new level on the chart.

Compare range contraction to a compressed spring. The expansion happens through a motion up or down in the time of the energy released from the spring. This is the movement in price that we often refer to as a swing, and it can often happen very quickly. If the move follows a pattern with higher highs and higher lows, this is an uptrend. The downtrend has the opposite pattern.

Swing traders look to catch the fastest part of this movement. Some choose to hold positions through several swings, as long as the underlying trend is not broken. Others prefer a shorter timeframe. Compared with other Forex trading styles, swing trading is neither considered a long-term style nor a short-term style. It is simply trading on the medium term timeframe. It is ideal for beginners who want to experience the thrill of the markets without the mental stress of day trading. However, many traders still choose to combine these trading styles with each other.

How Can You Find Good Price Swings?

Most of the time, prices in the Forex market moves within some sort of a trading range, perhaps as much as 70-80% of trading days.

Forex Market Range

You can use a daily chart to quickly browse through different Forex pairs in order to find situations that look promising. Once you have narrowed down your list, you can use a lower timeframe. For example the 1-hour chart could be used to look for your specific entries.

In general, there are three important factors to consider when taking a position in the market as a swing trader.

  • Swings often happen in the same direction as the general direction of the market.
  • Look for momentum in other currencies that share similar characteristics as the one you are approaching. For example, if you want to trade the Australian Dollar you should also check the Canadian Dollar. The reason is that both currencies depend on commodities and energy prices.
  • Evaluate the trend. Is the current trend strengthening or weakening? Weakening trends indicate that a change in the direction is about to occur. At the same time, strengthening trend may still be in its early stage.

Swing Trading Timing and Success Rate

An ideal situation may be to find for example the strongest among “commodity-related” currencies. Then, you can place your trade on that currency. If you know that the oil price rises, you may want to compare the performance of the Norwegian Krone, the Canadian Dollar, and the Brazilian Real. These three currencies are all heavily dependent on oil prices. Place your trade on the one that shows the strongest performance.

As a swing trader, it is important to be aggressive when you spot opportunities like this. Make sure you earn enough money on the easy trades to make up for your inevitable losses when times get tough. Also, it is important to adjust your trading strategies to the market conditions. A bullish swing trading strategy with 80% success rate and 5% average move in the price of the asset under good market conditions may have a 30% success rate and 2% average movement under bad conditions. Then you will lose money.

Just as it is important for a trader to be aggressive in the good times to make the most of them, it is equally important to reduce exposure or even refrain from trading in the bad times.

The famous American stock trader Jesse Livermore once said: “There is a time to go long, a time to go short, and a time to go fishing”. There is a lot of truth to this.

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