Swing trading is one of the several forex trading strategies used by millions of traders globally. The strategy involves buying or shorting currency pairs and holding the trades for several days. It differs from day trading, which ensures that trades are closed by the end of the day.
It also differs from position trading, which involves buying and holding positions for weeks or months. This article will look at how swing trading works, some of the popular strategies to use, and risk management approaches.
What is swing trading in forex?
Swing trading is a forex trading style where a trader does analysis and buys or shorts a currency pair and then holds the position for several days. Most traders hold several positions and exit them at a certain level when they become profitable. The strategy also involves making little profits several times per week. In the end, these several profits can lead to substantial gains.
A good example of a swing trade goes like this. On a Monday morning, you spot that the EUR/USD is rising and that it has just crossed the 38.2% Fibonacci retracement level. You also see that the price is higher than the short and longer-term Moving Averages.
As a result, you decide to buy the pair and set a take-profit at the 61.8% retracement level. To limit your losses, you place a fixed or a trailing stop-loss. In this case, your trade will be profitable if the upward trend continues. On the other hand, if the trend reverses, the stop-loss will be triggered, thus protecting your account.
Swing trading is a relatively popular style for several reasons.
First, it is a style that works, especially when you do it right. Second, you don’t have to be present at your trading desk every day. For example, you can set your trades up on Monday and leave them. Third, it’s cost-effective since you don’t need to pay a lot in commissions.
So, which are some of the most popular swing trading strategies in forex?
Trend following in the forex
The trend-following strategy is a popular way to swing trade as a forex trader. It is a strategy where you are only interested in buying a currency pair whose price is rising and shorting one that is falling. To achieve that, you need to do a quick market scan and identify pairs that are held in such a trend.
After identifying the pairs, it is wise to start by doing a quick fundamental analysis on them. In this, look at the reasons why the pair is moving in that trend. You could look at the recent economic data and news that moved the pair.
Next, look at the future events that will move the pair. For example, if the pair has a USD, it means that it will be moved by things like the US non-farm payrolls and Fed’s statement. Looking at future events will help you anticipate key moves in the future.
After this, you should conduct a technical analysis, where you add tools like Moving Averages and Bollinger Bands on the chart. If the price is rising, it should be supported by the Moving Average or being between the middle and upper line of the Bollinger Bands.
If you determine that conditions are right, you should open the trade and set your risk management tools. This is where you add a stop-loss and a take-profit.
Elliot wave in swing trading
Elliott wave analysis is another popular swing trading strategy in forex trading. This is a strategy that is based on the old principles of Ralph Elliot, who noted that financial assets move in waves.
The first bullish wave tends to be relatively short and is followed by another shorter pullback. This is then followed by the third wave, which is usually the longest. The third wave is then followed by a short pullback and another rally.
Therefore, the goal is to scan the market and identify currency pairs that are about to start their third phase and either buy or short them. The Fibonacci retracement tool and trend indicators will help you identify the potential points to set your stop-loss and take-profit.
Break and retest strategy
The break and retest is a good and relatively popular swing trading strategy in forex. It works when a currency pair that is in a consolidation pattern makes a breakout. This breakout is then followed by a retest of the previous resistance level.
When this happens, a swing trader can place a buy-stop at the upper side of the previous breakout and wait for the trade to happen. If the strategy works, the trader will then add a take-profit slightly above the buy stop location and stop-loss at the previous resistance level.
Chart pattern analysis
The next strategy in swing trading revolves around conducting chart analysis. This is a strategy where you scan the charts, identify patterns that you like, and then trade accordingly. For example, if you spot a head and shoulders pattern, you can place a sell-stop slightly below its neckline and wait. If this pattern works, your short trade will be initiated, and the take-profit hit as it drops.
Meanwhile, if you spot an ascending triangle pattern, you can place a buy-stop slightly above the resistance level. Since an ascending triangle is usually a bullish sign, you can place a buy-stop above the upper line.
If it does a bullish breakout, your trade will be initiated, and you can ride the new breakout wave. There are other patterns that you can take advantage of, like the symmetrical triangle, bullish flag, and cup and handle.
Summary
Swing trading is a popular trading style in forex. In this article, we have looked at some of the benefits of using the approach and some of the most popular techniques like break and retest and trend following.
