The forex (or foreign exchange) market is filled from top to bottom with trading strategies, each one carrying notable pros and cons. In separating the wheat from the chaff, one approach generating plenty of buzz around traders is swing trading. It is described by some as a fundamental form of forex trading, since positions are held not just overnight, but often for much longer than a day. The reason is that most fundamental traders (or fundamentalists by another name) are swing traders, basing moves off of corporate fundamentals that often require multiple days—or longer—to generate sufficient price shifts that can turn a profit.
Considering how more and more traders are making swing trading popular, it’s well worth gaining a further understanding of what this practice is all about. The following examines the exact nature of swing trading, along with addressing reasons why traders appear to be flocking to it.
What is Swing Trading?
Defining swing trading is pretty simple. It’s a short-term forex trading strategy for a trader buying or selling currency, based upon technical indicators that suggest the future occurrence of a downward or upward trend. This trend can span any length of time, ranging from days to weeks. Swing traders place a heavy amount of emphasis upon technical analysis, as a means of tracking a currency and determining when a “swing” is likely to occur. Swing trading generally means the trader will not be concerned with the long-term value of a currency, looking instead to profit from peaks and dips in momentum.
Advantages of Swing Trading
On paper, swing trading carries a fairly sound methodology, but no one can avoid the fact that it’s a fairly risky approach. However, with risk comes reward; swing trading carries a number of key advantages that just might give it an edge over other popular trading methods.
Trading time flexibility
Many trading methodologies have you strapped in for the long haul—long trading hours, long positions, and long-term commitment is often the call of the day. Swing trading is the antiphrasis of that method, offering traders a huge amount of flexibility. Since you aren’t looking to hold anything long-term, working instead from price swings, you have a fair amount of trading flexibility. Jumping between sessions is plausible, while strictly day trading is another option; regardless of your trading time preference, swing trading is flexible enough to suit.
Trade within clear boundaries
Trading with clear boundaries is advised, though grey areas can appear with some trading strategies. Where swing trading is so heavily based upon technical analysis, you can establish more control. Understanding when trades are against you can become easier to grasp, so you can limit the damage when necessary. Trading strategies that emphasize long positions offer up a wide berth on boundaries, while swing trading can make things easier to read.
Smaller stop losses
In swing trading, your stop losses are small, especially when weighed against longer term trades. For example, the stop losses on a swing trade could be 100 pips when based on a typical four-hour chart, but for a stop loss based upon a weekly chart and overall position, you might be staring down at 400 pips. With this in mind, swing trading allows you to opt for large positions instead of those with low-leverage implications that are common with longer-term trends.
Potential to dip in and out of the market
Swing trading allows you the freedom of dipping in and out of the market without too much fuss, so you can identify more trading opportunities. Within nearly any financial chart, you will see evidence of an emerging pattern, but swing traders will be looking for support and resistance. Moving in and out of the market at the right times, you can sweep quick profits and set up other trades in the process. Few other trading strategies will allow you to jump in and out of the market quite like swing trading.
Easier movement with the natural flow of the markets
The forex market carries a natural ebb and flow, though it may not seem like it. There is no such thing as a permanent upward or downward trend, something that swing traders examine for its full advantage. You can move with the market both ways, profiting from price rises during a bull market and falling prices during a bear market. Swing trading doesn’t lock you into any particular market, so you can move with whatever the forex market spits out.
While the lengthy approach to the market is suitable for some traders, others want to generate more trading opportunities on a daily basis. Swing trading allows for this by a focus on monitoring market movements, rather than sitting back and simply waiting for things to fall in your favour. Overall, swing trading is generating plenty of plaudits amongst traders, as it increases control, increases trading activity, and—most importantly—increases profit potential.
The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice. If such information is acted upon by you then this should be solely at your discretion and Valutrades will not be held accountable in any way.