What Are The Best Swing Trading Strategies in Forex?

Swing trading is one of the most popular trading strategies and has earned a strong base of support among retail Forex traders. As swing trading becomes a more commonplace strategy in the forex market, its worth gaining a deeper understanding of what this practice is all about. In this article, we'll explain exactly what swing trading is, share the best swing trading indicators and present some effective swing trading strategies.

What Is Swing Trading?

Swing trading is a fundamental type of medium-term market speculation where positions are held for longer than a single day. It can be used to trade in forex, futures, stocks, options, ETFs and cryptocurrency.

It is trading style requires patience to hold your trades for several days at a time. Swing trading stands between two other popular trading styles: day trading and position trading. Like day trading, swing traders aim to profit from both positive and negative action. However, swing trading strategies aren't bound by the day-trading dictum that all positions must be closed by the end of the day. Instead, they hold trades for as long as the current momentum lasts. That could be less than an hour, or it could be several days.

Swing trading is best suited for those who have full-time jobs or school but have enough free time to stay up-to-date with what is going on in the global economy.

Advantages of Swing Trading

1. Be able to identify and capitalize on major market moves

When you're invested for the long-term, you may not pay attention to what the market does on any given day; however, swing traders that jump in (and out) at the right time can significantly profit from just a day or two of market movement. And with the help of stop losses, you'll be able to place larger positions by minimizing the amount you could potentially lose on a trade gone bad.

2. Flexible trading time

You need less time on the trading platform but are financially better off in the long run. You will experience less stress overall as you can set up your trade on the trading platform, including stop losses and take profit orders, and leave the trade to run its course while you go about your business.

3. You have clear boundaries

The swing trader is a more technical based trader, and as such will normally have a specific area that they deem as being a sign the trade is working against them. Because of this, you know exactly when the trade is not working and can limit the damage a bad trade can do. Longer-term traders normally have to give a wide berth to the Forex market as they wait for them to "go with the fundamentals".

Top 3 Forex Swing Trading Strategies

There are several different trading strategies often used by swing traders. Here are the four most popular:

1. Range Trading

Range trading is one of the more popular trading approaches. This type of trading strategy aims to capitalize on ranging currency pairs that are mostly moving sideways between identified support and resistance levels. As such, technical analysis tools should be used to find support and resistance levels on a chart.

The first step of range trading is to find the range. This can be done through the establishment of using support and resistance zones. These zones can be created by finding a series of short term highs and lows and connecting the areas using horizontal lines. Resistance is the overhead range where we will look to sell a range, and support is the area where price is held up with traders looking to buy the market.

The price action is confined for most of the period within a trading range. Therefore, this swing trading Forex strategy is simple: buy the lows and sell the highs. Once the price action approaches the support or resistance levels, you start monitoring the price movements more closely. You can place buy/sell orders near these levels to automatically open trades.

2. Trend Trading

Trend trading is a strategy that involves using technical indicators to identify the direction of market momentum. It is based on the idea that markets have an element of predictability, so by analysing historical trends and price movements, a trader will be able to forecast what could happen in the future.

Trending markets tend to make strong moves in the direction of the trend followed by periods of consolidation or a counter-trend retrace before the next leg in the direction of the trend. You will notice this pattern happens in almost any trend you can find.

As the chart above, we can see an uptrend market which consists of strong upward moves followed by periods of retracement before the uptrend resumes. Typically, what happens to many traders is that they will make some money during the periods of strong directional trend movement, but then they continue to trade as the market takes a breather from the trend and consolidates. It's these periods when traders give up all of the gains they just made when the market was moving aggressively.

3. Reversal Trading

Reversal trading relies on a change in price momentum. A reversal is a change in the trend direction of an asset's price. For example, when an upward trend loses momentum and the price starts to move downwards. A reversal can be positive or negative (or bullish or bearish).

Anticipating a trend reversal in advance, gives you a chance to set up the take profit of a current trade in time or open a position at the best price in the opposite direction. You can use price patterns such as Head and shoulders, Double top and Wedge to spot a trend reversal, or use technical indicators such as Momentum, Stochastic, MACD and Divergence.

As the chart above, the first and third peak will be smaller than the second, but they will all fall back to the same level of support, otherwise known as the 'neckline'. Once the third peak has fallen back to the level of support, it is likely that it will breakout into a bearish downtrend. When you see a head and shoulders pattern, it's a sign that buyers are running out of momentum and the trend could be on its last legs.

Conclusion

Although there are profits to be found in swing trading, there are also risks that come with this method. The biggest risk comes during weekend hours, when the forex market is closed. Market changes could cause a price to gap and open at a much different price than its closing, which can put swing traders in a position where even a stop-loss is unable to spare them from a significant net loss. Above all, swing trading is not right for all traders, so it's best to practice with it risk-free first, on a demo trading account.