The forex (or foreign exchange) market sees a wide range of trading strategies used on a daily basis. Each one of them has its own pros and cons, although some strategies have a much better track record than others when it comes to delivering results.
In separating the wheat from the chaff, swing trading has earned a strong base of support among some forex traders. It is described by some as a fundamental form of forex trading, because positions are held not just overnight, but often for much longer than a day.
This is because most fundamental traders (or fundamentalists, by another name) are swing traders, basing moves off fundamentals that often require multiple days—or longer—to generate sufficient price shifts that can turn a profit.
As swing trading becomes a more commonplace strategy on the forex market, it’s worth gaining a deeper understanding of what this practice is all about. Here’s a look at the basic strategy behind swing trading.
What Is Swing Trading?
Swing trading is a short-term strategy for a trader who is buying or selling currency using technical indicators that suggest an impending price movement. This trend can span any length of time, ranging from days to weeks. Swing traders place a heavy emphasis on technical analysis as a means of tracking a currency and determining when a “swing” is likely to occur. Swing trading generally means the trader isn’t concerned with the long-term value of a currency, looking instead to profit from peaks and dips in momentum.
Take a look at the big spike in the value of NZD/USD from its low Sept. 2 to the peak of its rise Sept. 6. Although it has been mired in a monthslong decline, the quick four-day rise for the currency pair is exactly the kind of movement that swing traders are looking for:
You’ll also notice a brief period of consolidation before that price breakout, which is a common indicator traders will use to forecast a swing opportunity. In this case, it’s not about the long-term value of a pair, but rather its potential to experience a quick price movement in the near future.
Advantages of Swing Trading
On paper, swing trading carries a 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 commitments are often the call of the day. Swing trading takes a much different approach, offering traders a huge amount of flexibility. Because 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, whereas strictly day trading is another option. Regardless of your trading time preference, swing trading is flexible enough to suit.
Trading within clear boundaries
Trading within clear boundaries is advised, though gray areas can appear with some trading strategies. Swing trading is so heavily based on technical analysis that you can establish more control. 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 on a weekly chart and overall position, you might be staring 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.
In the NZD/USD example mentioned above, you can cash out your profits once the currency pair hits a level of resistance. And if you think the currency is going to resume its downward trend, you could even consider shorting the pair to turn a profit on both sides of the price movement.
This is a popular strategy when working with currency pairs that offer high volatility. USD/SEK is one such pair, offering a high volume of peaks and spikes over time, as its three-month graph illustrates:
USD/SEK is often regarded as a more “exotic” pairing because of the high volatility and, as a result, high risk that come with trading, making it prime territory for swing traders to try to claim some profits off a dramatic price swing.
By moving in and out of the market at the right times, you can sweep up 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. For example, the AUD/JPY pairing is well-known to mirror global investor sentiments. When the global market for investing is strong, this pairing tends to gain in value. By contrast, depressed investing sentiments are mirrored by the pair’s corresponding price movement. By combining this knowledge with other technical indicators, you can use a pair like AUD/JPY to capitalize on these ebbs and flows regardless of how the market fluctuates.
In the best-case scenario, swing trading makes it possible to profit from rising prices 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.
The lengthy approach to the market is suitable for some traders, but others want to generate more trading opportunities on a daily basis. Swing trading allows for this by focusing on monitoring market movements, rather than sitting back and simply waiting for things to fall in your favor.
Overall, swing trading is generating plenty of plaudits among traders as it increases control, trading activity, and—most importantly—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.