Swing trading could be ideal if you’re interested in trading Forex but prefer not to be constantly at your computer. This method maintains a balance by keeping trades open for a few days to weeks, enabling you to benefit from substantial price shifts without needing continuous market observation. Regardless of your experience level, whether you’re a seasoned trader or a beginner, swing trading can offer a beneficial strategy.
In this article, we’ll dive deeper into the definition of Forex swing trading, how it operates, and why it may be the right approach for you. Keep in mind that Swing Trading can be used in crypto markets. But fewer price movements in crypto might cause fewer profits in swing trading.
What Is Swing Trading?
Swing trading is an approach that aims to take advantage of short- to medium-term price changes, or “swings,” in the market. These swings can happen whether the market is going up, down, or staying the same. As a swing trader, you try to make money from these changes by buying when prices rise and selling when prices fall.
Swing traders differ from long-term investors, who hold positions for months or years. Instead, swing traders focus on smaller, more frequent price movements and hold trades for several days or weeks, offering more flexibility than day trading.
You can think of swing trading like surfing. You wait for the perfect wave (price movement), ride it as long as possible, and exit before it falls (reverses). The goal is to take advantage of the wave for profits, not to hold onto it for the long term.
Swing Trading vs. Day Trading
Day trading involves buying and selling currencies within the same day. It demands constant attention to price movements and is suited for those who can dedicate time to the markets.
In contrast, swing trading allows you to hold trades for days or weeks, offering more flexibility for those with other commitments. While it still requires market analysis and monitoring, it’s less intense than day trading. In summary, day trading is time-intensive, while swing trading is more relaxed.
Types of Swing Trading
Swing trading is a trading style defined by its time frame. Many strategies can fit this style, making it hard to pinpoint Forex’s best swing trading strategy.
The strategies discussed here are not limited to swing trading or Forex. Like many technical methods, they focus on key ideas such as support and resistance. Below, we will describe three swing trading strategies you might consider using.
Trend Pullbacks:
The trend is your friend, as the saying goes. This is why entering a short-term pullback from a firm trend just as it reverses and the dominant trend resumes is one of the most successful swing trading strategies. When identifying a trend, it’s essential to recognize that markets don’t tend to move in a straight line. Even following a trend, they move up and down in step-like moves.
We recognize an uptrend by the market setting higher and lower lows and a downtrend by identifying lower lows and lower highs. Early in a trend, swing traders may look to enter at a touch of the 8-day moving average, while others might want to wait for a bounce off the 20-day moving average.
Support and Resistance Trading:
This approach identifies key price points where an asset has faced resistance or support. Traders expect prices to keep reacting at these levels, so they establish their entry and exit points within these support and resistance zones.
Breakout Trading:
The breakout strategy focuses on assets with significant price consolidation within a tightening range. It initiates a trade when prices move above resistance or dip below support levels.
Fibonacci Retracement:
After a significant price change, traders often expect a slight pullback before the price returns to its original direction. Fibonacci retracement uses key percentages of 23.6%, 38.2%, 61.8%, and 161.8% to identify possible reversal points. Fibonacci levels are more reliable when they match with other support or resistance, like moving averages or past reversals.
Chart Patterns:
Skilled swing traders recognize chart patterns that indicate potential reversals or continuations of trends. These patterns provide clear entry points that minimize risk and show when a trade has been unsuccessful. These patterns include head-and-shoulders, double tops, double bottoms, flags, and pennants.
5 Best Indicators for Swing Trading
Using the best indicators for swing trading is crucial to succeed. These indicators help traders analyze price movements, identify trends, and determine the correct entry and exit points. In this guide, we will explore the top swing trading indicators, how they work, and how you can use them to improve your trading strategy.
1. Ease of Movement (EOM)
Ease of Movement (EOM) indicates how stock prices change about trading volume. It helps you understand how easily a stock’s price moves and if substantial volume supports these changes.
To calculate EOM, subtract today’s low price from today’s high price, then divide by volume. Smooth the result over several days. Positive EOM indicates an uptrend, meaning the price rises quickly on lower volume. Negative EOM shows a downtrend.
Use EOM to assess trend strength. If EOM rises with the price, it confirms a strong uptrend. If EOM falls with the price, it confirms a strong downtrend.
2. Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a helpful tool for swing trading. It measures how quickly prices change and ranges from 0 to 100, indicating overbought or oversold conditions.
If the RSI exceeds 70, the stock may be overbought and likely to drop. An RSI below 30 suggests the stock is oversold and may rise.
You can use the RSI to spot potential reversals. A drop from above 70 may signal a sell, while a rise from below 30 may signal a buy.
3. Bollinger Bands
Bollinger Bands helps identify market trends and volatility. They consist of a middle line, usually a 20-day moving average, and two outer lines that show standard deviations from the middle.
To use them if the price touches the upper band, it may be overbought. If it touches the lower band, it may be oversold. A squeeze indicates a potential breakout, while wide bands indicate high volatility.
In practice: Use Bollinger Bands to find breakout opportunities. A price rise above the upper band with high volume suggests an uptrend, while a drop below the lower band may signal a downtrend.
4. Moving Averages (MA)
Moving Averages (MA) are helpful tools for swing trading. They show the market trend by smoothing out price changes. The main types are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA).
To use them, calculate the average of closing prices over a set time. A short-term MA (like 20 days) crossing above a long-term MA (like 50 days) signals a buy (Golden Cross), while the opposite signals a sell (Death Cross).
Moving averages help identify trends and reversal points. If the price is above the moving average, it indicates an uptrend; if it’s below, a downtrend. Use crossovers to determine when to enter or exit trades.
5. Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence (MACD) is an indicator that tracks stock price trends.
How to Use: The MACD line shows the difference between the 12-day and 26-day moving averages, while the signal line is the 9-day moving average of the MACD line. When the MACD line crosses above the signal line, it suggests a buy signal; when it crosses below, it indicates a sell signal.
Practical Application: Use the MACD to identify trend changes and their strength. A crossover above the signal line can suggest an uptrend, while a crossover below may signal a downtrend.
Pros and Cons of Swing Trading:
Swing trading is like any other technical analysis strategy with pros and cons. Knowing its potential and limits will help you decide if this strategy suits you.
Pros
Lower Time Commitment:
Swing trading requires less time than day trading. Swing traders mainly use technical analysis, so they only need to check their charts once a day or every four hours. They don’t have to watch the charts all day or keep an eye on smaller time frames. This makes swing trading flexible and suitable for people who work during the day.
More Profits On Single Trades:
Swing traders aim to seize considerable profits during medium-term market trends. This requires seeking trades that offer appealing market risk/reward opportunities, frequently leading to trades that yield substantial profits relative to the associated risks.
Traders Can Rely Solely on Technical Analysis:
Swing trading mainly uses technical analysis, which makes trading easier. This approach reduces the need for in-depth fundamental analysis. Using effective swing trading strategies, traders can take advantage of the best market opportunities.
Cons
Unexpected Price Movements During Overnight and Weekend Sessions:
Swing trades are usually kept overnight or over the weekend. This can put traders at risk due to price gaps or important news that might occur when the market is closed. Such events can activate the stop loss of swing trade positions.
Can Miss Out On Quality Long-Term Trends:
Swing traders enter trades when they expect price changes, which can cause them to miss strong long-term trends. For example, Apple stock has steadily increased, offering higher profits for those who held it. In comparison, swing traders would have only made small profits.
Market Timing Is Difficult:
Swing trading uses technical analysis to predict medium-term price changes in the market. However, timing the market can be tricky, even for experienced traders, because prices can behave randomly and fluctuate significantly in the short term.
How do you set the best stop loss for swing trading?
The effectiveness of a stop loss in swing trading depends on your strategy and backtesting results. Many traders report better performance without a stop loss, opting for alternative risk management methods like diversification across uncorrelated asset classes (e.g., gold, silver, currencies, crypto, crude oil, and stocks) and employing different strategies such as trend-following and mean-reversion.
Consider a volatility-based approach that matches your expected holding period when using a stop loss. For example, if you typically hold trades for a week, set a stop loss that reflects that volatility to protect against significant market shifts. Alternatively, a time-based stop that exits the trade after a set period can also work well. Ultimately, there’s no one-size-fits-all solution for the best stop-loss strategy in swing trading.
When to exit a trade
Everyone wants to exit a trade profitably, but deciding when can be challenging. Setting your profit target too high might cause the price to drop before reaching it while setting it too low could mean missing out on more profit. The right exit point depends on your trading strategy and its past performance.
For mean reversion strategies, sell when prices are firm. Aim to ride the trend as long as possible in a trend-following strategy.
Exit the trade when the reason for entering fades. For example, if you buy when the RSI shows the price is low and later shows the price is high, it could be time to sell.
Also, understand the maximum favorable price excursion, which indicates how far the price usually moves in your favor before reversing. Always backtest your strategy and journal your trades to find the best exit method and maximize results.
Conclusion
In conclusion, swing trading balances day trading and long-term investing. Traders can use moving averages, RSI, and Bollinger Bands to make informed decisions and capture medium-term market trends. This strategy is appealing to those with busy schedules due to its flexibility. However, it also faces challenges, such as sudden price changes and timing issues. By understanding the principles in this guide, traders can improve their swing trading skills, manage risks, and aim for better gains. Continuous learning, testing, and having a detailed trading journal remain essential for long-term success.
