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What is a Swing Trade in Forex?
On a regular basis, the forex market witnesses a diverse collection of trading strategies. Each has its own set of advantages and disadvantages, but some tactics have a stronger track record than others when it comes to achieving performance.
Swing trading has gained a large popularity among forex traders for its ability to separate the wheat from the chaff. Some consider it to be a fundamental form of forex trading.
But what is swing trading, and why are we talking about it?
In this guide, we are going to hone in on swing trading and find out how you can utilize it for your trading benefits.
What is forex swing trading?
Swing trading is a trading strategy that seeks out long-term rallies or long-term declines. It may also be referred to as long-term trading or trend trading. Swing traders detect potential trends and then keep the trades for an extended period of time, ranging from two days to several weeks.
Traders seek to capture a wider price range of stock, forex, or other financial instruments by holding the position for longer periods.
Swing trading requires patience as well as adequate risk management.
It is perfect for those who are unable to monitor their trades during the day but can devote a couple of hours to analyze the market every night.
The key is to focus on the price movement of currency pairs so that you can enter at an appropriate level and exit with a profit later. However, depending on your strategy, you can opt to hold your position open for weeks.
Swing trading is not the same as long-term trading strategies. It is often used by institutional investors, who typically retain their investments for a long period of time.
Swing trading seeks to detect swings within a medium-term pattern and enters the market only when there is a high likelihood of success.
In an uptrend, for example, you have to go long at swing lows. On the other hand, short at swing highs to capitalize on temporary countertrends.
Types of Swing Trading
There are various different trading strategies often used by swing traders. Here are a few of them:
1. Reversal trading
Reversal trading is based on a change in market momentum. A reversal is a shift in the trend direction of the price of an asset. For example, when an upward trend loses momentum and the price begins to fall. A reversal can be either bullish or bearish.
2. Retracement trading
Trading retracements or pullbacks means looking for a price to momentarily reverse within a broader trend. Price briefly retraces to a previous price point before continuing to travel in the same direction.
Reversals can be difficult to forecast and distinguish from short-term pullbacks. A reversal is a pattern transition, whereas a pullback is a shorter-term mini reversal within an ongoing trend.
Consider a retracement to be a minor countertrend within a major trend.
Price moving against the primary trend should be short and fast if it is a retracement.
3. Breakout trading
Breakout trading is a strategy in which you enter a position on the shorter side of an uptrend and wait for the price to break out. You reach a position as soon as the price breaks through a key level of resistance.
4. Breakdown Strategy
The inverse of a breakout strategy is a breakdown strategy. You enter a position on the shorter side of a downtrend and wait for the price to break (also known as a downside breakout). You open a position as soon as the price breaks through a critical level of support.
Best indicators for Swing trading
Swing trading success is heavily reliant on the indicators you use to identify swings. Here are some of the most common swing trading indicators:
1. Moving averages
Moving averages, especially long-term moving averages, can help you recognize trend reversals that indicate a swing opportunity and understand the overall intensity of that trend, but they are best used in conjunction with other indicators.
2. RSI
The relative strength index (RSI) is an excellent tool for identifying potential swing trade opportunities based on bearish or bullish setups, especially if you are looking for opportunities in a shorter time frame.
An RSI reading over 70 suggests overbought conditions, which could lead to a price drop. An RSI below 30 can, on the other hand, implies oversold conditions under which a currency pair is likely to gain value.
3. Support and resistance
Lines of support and resistance can help you define swing opportunities based on your assumption of a retracement or extension if you use Fibonacci or other trading strategies.
Swing trading is a trading style that exists between two other common trading styles: day trading and position trading. So, let's find out what the difference is between them.
Swing trading vs. day trading
As the name implies, day trading involves making loads of trades in a single day using technical analysis and advanced charting systems. The aim of a day trader is to make a living by trading stocks, commodities, or currencies and making small profits on various trades while limiting losses on unprofitable trades. Day traders do not normally hold any positions overnight.
Swing traders must be mindful of evolving patterns that occur over a few days or weeks instead of minor market changes that occur over minutes or seconds. This means keeping up with investor sentiment and economic news to get a sense of where the market is headed.
Swing trading is open to everyone with experience and resources. Swing traders do not need to be glued to their computer screen all day due to the longer time period (from days to weeks as compared to minutes or hours). They can also work a full-time job (as long as they are not checking trading screens during their office hours. Boss will always give you a look).
Less experienced traders might find swing trading hard to master, while pro traders may have the experience to profit from it. It's not always possible to get in and out with large volumes hat quickly.
Swing vs. position trading
Position trading, as opposed to swing trading, involves holding a position in forex pair for an extended period, usually several weeks at a minimum. A position trading does not allow regular price movements or market news to affect their trading strategies. Instead, they are concerned with long-term results and enable their specific holdings to fluctuate in line with general market patterns in the short term.
Fundamentally, position traders choose forex pairs based on general market dynamics, and long-term historical patterns that they expect will rise dramatically over time.
The key difference between swing trading and position trading is the time that the financial asset is hold. Position trading requires a longer timeframe than swing trading, which seeks to catch price ups and downswings for a brief period of time, for a few days or weeks.
FAQ
- What are the swings in swing trading?
Swings attempt to distinguish entry and exit points in a forex pair based on intra-week or intra-month oscillations between optimistic and pessimistic periods.
- What are some of the indicators or instruments that swing traders utilize?
Swing traders can use moving averages on regular or weekly candlestick charts, trend indicators, price range tools, and market sentiment indicators. Swing traders search for technical trends such as the head-and-shoulders and cup-and-handle.
- Can I become a swing trader?
You can become a swing trader if you don't mind keeping your trades for many days and are able to take less trades but be more cautious to ensure they are really good setups.
Pros
- Swing trading is perfect for those who have full-time jobs and can't dedicate enough time every day. This also implies that swing traders will have another form of income even if they suffer from a loss.
- You can set wider stop loss , so it can help you reduce your positions that would have been close earlier.
- Day traders often show emotions and glued to their screen. This is not required for swing trading, as you don't need to analyze your positions every day.
- Swing trading can be more lucrative as holding positions for longer periods can yield higher profits.
Cons
- For swing trading, you must understand technical analysis to identify the entry and exit points. While a pro can achieve this, a beginner may find it difficult.
- Trade positions are subject to unexpected overnight and weekend market fluctuations.
- Holding positions for a longer period may result in larger profits, but it can also be the other way round because of leverage.
- Although swing trading doesn't seem dramatic, it can become intense when things don't go in your favor.
- When you hold positions overnight, your brokers charge a swap fee. And when you hold positions for a week or a month, swap rates can add up.
Bottom line
Swing trading can be your style if you have a full-time job but enjoy trading on the side.
It is important to note that each trading style has pros and cons, and it is up to you to decide which one you will use.
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