What is Swing Trading in Forex?
In this article
Let’s get into a discussion about what swing trading is in forex. A swing trading strategy is the short-term or medium-term trade that takes advantage of price changes to profit. Positions in financial assets are typically held for only a few days before they are sold.
Swing trading refers to the overall movement in the price of an asset from one certain value to another. Get ready to know all about swing trade in forex in detail here.
It’s important to keep track of different types of security movements so that you can buy at a reasonable price and sell shortly after that at a profit. Depending on their strategy, some traders may hold their positions for weeks.
Long-term trading strategies differ slightly from swing trading. Typically, institutional investors hold their assets for a long time, so they often use them.
Their goal is to ride the volatility of the asset’s price, only capping out when the asset’s value reaches an advanced or mature stage, which has increased markedly.
Swing Trading: Indicators & Signals
Swing trading: How to do it?
Spread betting and CFDs are two derivative products that can be used with swing trading.
You can begin swing trading right now by opening a live account, depositing funds, and choosing the asset you are interested in trading.
If you’d prefer to practice your swing trading strategies through the virtual fund of £10,000, you can easily open a demo account.
Swing trading: Its benefits
People with full-time jobs can trade this way since they don’t have to devote hours each day to trading. Swing traders can even make some money from other few sources if they lose profit.
Setting wider stop-loss orders can reduce the number of prematurely closed positions.
Staying calm and focused on your screen is less important in swing trading since the process happens slower. This is quite less important for day traders.
Trading swings can be more efficient than opening new positions every day because holding positions for higher returns is more efficient than opening new positions every day. However, choosing this option requires traders to take into account holding costs.
The downsides of swing trading
To identify entry and exit points, traders should have basic knowledge related to technical analysis. For example, professional traders may effortlessly analyse price charts, but those interested in swing trading need to practice more.
Depending on the trader’s time horizon, you may face gaping since the position will be held overnight or over several nights. A longer holding period may lead to larger profits in the case of leveraged positions, but it can also lead to greater losses.
It can still be stressful when swing trading begins to move in the wrong direction.
Is swing trading similar to day trading?
Using technical analysis and sophisticated charting programs, day traders make dozens of the best trades in just a single day. As a result, small profits are scalped multiple times by day, trading without holding any positions overnight.
The positions of swing traders are not always closed daily but may be held for weeks, months, or even years. In addition, fundamental and technical analysis is often combined in swing trading.
Strategies for swing trading are commonly used.
Getting started with some swing trading requires that you create a powerful strategy. The number of possible strategies for any trading opportunity is endless. Generally, swing trading strategies are categorised into one or more categories.
1. Mean Reversion Strategies
Mean reversion is a common strategy type. Mean reversion states that the market exhibits exaggerated moves to one side, corrected by reverting to the mean. The market swings around its average.
A mean reversion strategy is used to detect oversold or overbought market conditions. Oversold conditions occur when the market has swung too far to the downside. Conversely, overbought markets usually indicate that they are overvalued.
A few common ways to do this include oscillating or the RSI indicator.
2. Trend Following Strategies
In contrast, trend-following strategies work opposite to mean reversion strategies. An overextended market tends to revert to its mean, while a market following the momentum tends to hold on to the current trend.
Swing trading strategies based on momentum are effective, but they are much more difficult to find edges than mean reversion. In this case, you might want to think about doing a mean reversion strategy in addition to your current trading strategy to diversify your portfolio.
3. Breakout Strategies
A breakout strategy is quite similar to a trend-following strategy. However, the strategy works with a breakout level. When a stock crosses above that level, it is considered a strong indication that the market will continue advancing in that direction.
It works the same as trend-following strategies.
Sometimes it isn’t enough to buy a stock when it breaks above a certain level. There are often filters and additional conditions included to ensure that only trades that are most likely to be winners are taken.
4. Pairs Trading Strategies
An example of pair trading is entering a position in two stocks in the same industry that normally are correlated with each other. Your strategy suggests that the correlation is weakening; you short one stock and buy the other.
Hence, you hope to profit if one of the stocks rises and the other falls.
5. Sector Trading Strategies
Identifying the strongest market sectors is the aim of sector trading. The sector selection is a way of selecting stocks of the most promising sectors for trading, thus representing a strategy filter. Then, you pick individual stocks that match your criteria based on your chosen sector.
Advanced Swing Trading Entry & Exit Points
Swing trading indicators: what are they?
Swing traders use swing trading indicators to identify new trading opportunities. Between highs and lows (and vice versa), swing traders are looking to profit from mini trends. Using indicators, they can identify that momentum as quickly as possible.
An indicator will help swing traders identify two types of opportunities: trends and breakouts. Short-term oscillations are a component of longer-term market trends. New trends begin with breakouts.
The swing trader may use indicators on virtually any market, including forex, indices, shares, and cryptocurrencies. Sign up for a live IG account to begin trading these markets, among others.
Check out our guide to the best indicators; every trader should know if you’re looking for indicators to use with any trading strategy.
When more traders buy or sell, there is a better basis for price action. Swing traders use volume to determine the strength of a trend as it provides insight. Generally, a trend with high volume will be stronger than one with low volume.
Volume plays an important role in breakout strategies. There is typically a period of consolidation followed by a period of breakouts. Spikes follow this in volume!
2. Ease of movement
Easy of movement (EOM) reveals volume’s relationship with price by showing you how it moves. For example, EOM can determine whether a low volume of trades drives the market movement.
Using zero as the baseline, the EOM indicator is plotted on a chart. In general, rising EOM indicates that the market’s price is advancing with relative ease – and the higher EOM increases, the easier it is for its price to advance. Conversely, the EOM dips below zero in a market that falls with increasing ease, indicating a falling market.
3. Relative strength index
A swing trader often relies on momentum indicators to identify possible oscillations within a trend. For example, RSI, an indicator that determines whether a market is overbought or oversold, helps forecast imminent price swings.
The RSI measures how many market positive and negative closes there have been over a while (usually 14). An oscillator is a chart where the value moves from zero to one hundred.
4. Stochastic oscillator
Stochastic oscillators are momentum indicators that work similarly to RSI. The closing price is compared to its price range over a period.
On a chart, the stochastic oscillator appears between zero and 100, just like the RSI. It comprises two lines, however, unlike the RSI. The current oscillator value is shown on one chart and the three-day moving average. In this case, however, a reading over 80 indicates overbought, while one below 20 indicates oversold.
A strong trend could stay in either territory for a long period if the reading is overbought or oversold. Due to this, many traders look for a crossover of the two lines as a sign of impending reversal.
5. Support and resistance
The areas on the chart of a market that are difficult to cross are called support and resistance. Many technical strategies rely on them, and swing trading is no exception.
Markets tend to bounce back higher after dropping to a support area, and bulls will usually step in to fill the void. On the other hand, the market falls when it hits an area of resistance. This makes them useful for identifying reversals and opening and closing trades as close as possible to them.
A market’s strength is judged by how many times it bounces off a support or resistance line. It often leads to a breakout if the market moves beyond that area.
Rule of thumb in swing trading
Trading against an existing trend, or reversal trading, is not preferred. If the price is trending up, go long, and if it is trending down, go short.
As a trader, you will improve your odds of success by following the existing trend. Befriend the trend!
A stock could move up 10% in one day and then fluctuate sideways the next few days.
Our goal is to find a proper consolidation pattern, such as a bull flag and bear flag, or trigger points that we believe will fuel a breakout or breakdown of the stock and continue the current trend.
Your entry point for the trade should be a support, resistance, or trendline level. To succeed in the markets, you need to develop your skills in technical analysis to locate proper swing trading opportunities.
The art of technical analysis is not the same as its science. Technical analysis trading requires strict risk management.
Related questions: FAQs
1. Swing traders make how much money?
Day traders may make $1,000 per day, whereas swing traders may make $5,000, $12,000, or $60,000 per month. Traders feel comfortable at different levels. However, as your income increases, you will have less motivation to compound your returns.
2. What is the difference between swing trading and day trading?
Swing trading and day trading differ mainly in their time frames. In contrast to day traders, swing traders do their trading within a much longer time frame. In swing trading, the trader needs to be patient. Otherwise, day trading is the better option.
3. Is swing trading profitable?
A swing trade can also lead to substantial losses, as can any trading. A swing trader holds their positions for a much longer period than a day trader, so they are also at risk of larger losses. Swing trading is rarely a full-time job, so burnout from stress is rare.
4. What is the best way to start swing trading?
Beginners should consider swing trading. You don’t need to be an expert to do it. Further, if you’re not a full-time trader, swing trading might be a better option since you don’t have to sit in front of a computer all day.
5. What is the optimal number of stocks for swing trading?
Growth stocks are what they are looking for, which is good advice. They do not trade swings on a short-term basis. It is recommended you buy ten stocks, if not twenty. I would not recommend buying more than five different stocks at a time for new traders.
Trading swings can be a good alternative strategy for people who prefer short-term trading but don’t have the time to trade every day. It is much more efficient than day trading, as it requires some comprehensive understanding related to technical analysis.
Trading involves some risk, as with anything else. Trading swings, especially those just starting, require a solid understanding of technical and fundamental indicators.
A swing trader should also consider placing a stop-loss order in case breaking news may affect the direction in which the market moves.
Jason Morgan is an experienced forex analyst and writer with a deep understanding of the financial markets. With over 13+ years of industry experience, he has honed his skills in analyzing and forecasting currency movements, providing valuable insights to traders and investors.
Forex Content Writer | Market Analyst