Swing trading is a short to a medium-term trading strategy that aims to profit from strong price changes or else price 'swings'.

 

Major Characteristics of Swing-Trading

Swing traders use fundamental analysis to spot trading opportunities and technical analysis to analyzing patterns and confirm price trends.

• It involves periods from a few days to several months

• Swing trading minimizes intraday cost (spreads and commissions are practically irrelevant)

• As positions remain active overnight, the swap rates become very important

• Swing trading exposes traders to weekend risk (potential gaps may not activate stop-loss orders)

• High trading-leverage is not an option for swing trading

• Only high Reward/Risk trades are compatible with swing trading strategies

 

 

Trading Strong Trends on the Foreign Exchange Market

Forex currencies trend well. These strong trends last from several weeks to several months and provide several opportunities for profitable trading. There are always many opportunities in the Foreign Exchange market.

Long-term charts are important for interpreting where the market goes. However, Forex swing traders will usually look for opportunities on the 4-hour and daily charts. Exact entries and limit orders are decided in shorter timeframes:

• Weekly and Monthly charts for interpreting price action and recognizing the phase of the market

• H4 and Daily charts for the identification of strong trends, or potential reversals after overbought/oversold market conditions

• 15-Minute to 1-Hour charts to decide the exact entry levels and place accurate limit orders

Example on the US Dollar Index

In the below chart, analyzing the trend of the US Dollar Index (USD-X) using the Weekly chart. The main focus is on historical support and resistance (S&R) and the formation of a long-term price channel. If the price touches the low boundary of the price channel it will signal a long trade on USDX and a short trade on EURUSD. Note that the EURUSD overnight swap rate traditionally favors short positions.

Chart: US Dollar Index (Weekly)

 

 

Swing Trading Pros & Cons

Swing trading is one of the most profitable trading styles for retail traders. Swing traders avoid a wide variety of intraday market risks and enjoy a great number of advantages. They are flexible in the mid-term but at the same time they can avoid the annoying short-term market ‘noise’:

(√) Swing-Trading Pros:

• Taking advantage of trade-setups and riding strong mid-term trends

• Minimizing the negative effect of frequent trading (paying less cost)

• Eliminating the emotional risk of frequent intraday

• Occasionally, taking advantage of positive overnight rates (swaps), as in the case of going short on EURUSD

• Eliminating the short-term market ‘noise’ and the impact of unfavorable intraday news and events

• Avoiding the stop-hunting techniques of institutional traders

• Saving precious time

(X) Swing-Trading Cons:

• Exposure to weekend market risk

• High exposure to overnight rates, which may totally exclude certain exotic pairs (i.e. going long on USDTRY)

 

Reward/Risk and Money Management Rules

Selecting exclusively high Reward/Risk trades is essential for a swing trader. Professional traders make 80% of their annual profits out of 20% of their total trades. That means that they need only 1 successful trade out of 5 to be profitable. This can only happen if the Reward/Risk ratio is considerably high.

These are some important facts:

• 80% of the profits of professional traders are coming out of 20% of their total trades

• The minimum Reward/Risk ratio should be more than 3, but the recommended is 5

• The best tactic for successful swing trading is running profits using a trailing stop

• Always using tight trading leverage 

Using Long-Term Charts to decide Risk and Reward

Swing traders use historical support and resistance (S&R) levels to decide their risk and reward. By analyzing long-term charts, they can determine where to place a take profit and a stop-loss, and in this way limit their loss potential. Nevertheless, as was mentioned before, swing-trading incorporates the weekend risk and that means that a stop-loss order can remain unfilled.

 

Hedging Against the Weekend Risk

Money management is very important for every trading style. These are some simple Money Management rules for limiting the weekend risk:

• Apply tight money management by limiting trading leverage
• Don't risk more than 2% of your capital in any position
• Use the economic calendar to predict extreme market volatility
• Use exclusive trading accounts for each of your swing-trades

The smartest thing for a swing-trader is to use multiple dedicated trading accounts. Each trading account should include one and only swing-trade by keeping enough dollar margin to cover the stop levels. That means calculating how much margin each trading position requires and keeping only that amount in your trading account.

 

 

Trade Setups and Basic Technical Analysis

One key rule for successful swing-trading is the use of trade setups. A trade setup is a desired configuration that may include one or two confirming conditions. Confirmation can derive from chart patterns, candlestick patterns, indicators, etc. Smart traders stay out of the market until the market meets their setup conditions.

• Wait until the market meets your setup, never change your setup to meet the market

Spotting Opportunities

The correct interpretation of price action using technical analysis is an essential step for successful trading. Swing traders keep an eye on multiple charts. The monthly and weekly charts are very helpful in recognizing the phase of the market cycle. However, the Daily and H4 charts are the main decision-making charts.

• Swing-traders use multiple charts
• Combining technical analysis and volume to evaluate key market conditions and identify strong trends

Basic Technical Analysis Conditions

• Higher highs and higher lows on the Daily chart (for going long)

• Breaking major support or resistance levels

• RSI readings on the Daily chart (avoiding extremely overbought/oversold markets)

• MACD signals on the 1-Hour chart and above

These are also some basic TA confirmations:

• Volume is the most important confirmation for a proper price breakout

• Candlestick formations on high charts (i.e. a gravestone Doji is a strong bearish reversal candlestick)

• Chart patterns, and especially the very reliable Cup&Handle and Rounding Tops/Bottoms patterns

• Harmonic Patterns

• Potential divergences between the slope of the price chart and MACD/RSI slope

 

Using Support and Resistance Triggers

Support and resistance lines represent certain price levels at which the price tends to stop and reverse. These levels are characterized by multiple touches before a price breakthrough. If the price breaks a key support and resistance level and the volume increases it is the perfect setup for entering a swing trade in the same direction.

• Waiting for at least one daily close

• Volume matters, the volume must significantly increase during a proper breakout

A swing trader would enter the market after the market has closed daily above the resistance or below the support level, by placing a stop loss below the key resistance (long-trade) or above the key support (short-trade). 

 

Basic Indicators for Swing Trading

These are some key technical analysis tools for spotting swing-trading opportunities:

• Relative Strength Index (RSI)

RSI is the perfect tool for identifying overbought/oversold markets. The significant chart for RSI is the Daily chart, however, the 4-Hour chart can also be used.

• Moving Averages

Moving averages are lagging indicators, however, the 55-day and the 200-day SMAs can provide support and resistance levels for Forex traders

• Stochastics

The stochastics is another momentum indicator, similar to RSI. The stochastics oscillates between zero and 100. Unlike the RSI, the stochastics contains two lines. One line represents the value of stochastics, and the other one a three-day MA. A reading over 80 is thought of as overbought and under 20 is oversold.

• Moving Average Convergence/Divergence (MACD)

MACD has multiple uses, but it is mainly used for trend evaluation and the early-recognition of a trend reversal (H1 charts and above).

• Volatility Indicators/Overlays

This category includes tools such as the Average True Range (ATR), the Bollinger Bands (BB), and the Parabolic SAR

 

Key Patterns

The focus remains on high charts where chart patterns are considerably reliable predictors of the upcoming price action. Common patterns in the Foreign Exchange market include:

• Triangles, which are very common in every financial market, the end of a triangle always leads to a key price breakout. Ascending triangles will probably break on the upside and descending triangles on the downside

• Wedges & Pennants, which occur when a Forex pair consolidates after significant price action

• Cup & Handle and Rounding Tops/Bottoms, which are extremely reliable (based on historical data)

• Head and shoulders, not as reliable as Cup & Handle and Rounding Tops

• Candlesticks, which can provide confirmation regarding trend continuation or reversal. The higher the timeframe a candlestick formation occurs, the more significant it becomes

 

 

Summarizing -Key Tips for Forex Swing Traders

Swing trading is one of the most suitable trading styles for retail currency traders as it minimizes intraday cost (spreads and commissions) and eliminates the emotional hazards of day-trading. These are some tips:

1. There are many swing-trade opportunities in the Foreign Exchange market throughout the year. Consequently, there is no reason not to be extremely selective on your trades.

2. Create detailed setups and entry conditions and wait until the market meets your setup and qualify for an entry. Don’t ever change your setup to meet the market. This is a terrible mistake.

3. Although swing-trading focuses on mid-term charts (H1 to D1), longer charts matter as well. Start any analysis with the Weekly and Monthly charts and focus on closings by ignoring the wicks. Weekly and monthly charts can identify key support and resistance, based on historical closings.

4. When you enter an established trend, keep an eye on RSI. The key timeframe to watch is the Daily. If RSI on the daily is below 20 or above 80 this means the market is extremely oversold/overbought.

5. Seek for confirmation using price patterns and candlestick formations, the higher the timeframe they occur, the more significant they become.

6. Overnight swap rates are very important for swing traders. Spreads and commissions are not. Keep always a close eye to what you will be paying for maintaining your positions overnight.

7. Using high trading-leverage is not an option for swing trading. Swing trading exposes traders to high market risks including the weekend risk (potential gaps may not activate stop-loss orders).

8. Don't risk more than 2% of your capital in any swing-trading position.

9. Use multiple dedicated trading accounts. Each account should contain enough margin to cover the stop levels of each individual position.

10. Only high Reward/Risk trades are compatible with swing trading strategies. The minimum Reward/Risk ratio should be more than 3, but the recommended is 5.

 

Choosing a Suitable Forex Broker

Selecting a reliable and competitive Forex broker is essential for successful trading. These are some required features for swing traders:

• Offering real safety of funds (years in the market, headquarters country, regulation, compensation scheme)

• Providing full access to the markets you will be willing to trade

• Offering competitive swap rates (very important)

• Negative-balance protection (don’t forget about the weekend risk)

• Full set of trading orders 

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