Forex trading: swing trading strategies

Swing traders who may hold a position for more than one day but will rarely hold positions in excess of one week. This is the trading style that is best suited to part time traders who work at other fulltime jobs. Profit potential for each trade can be in the range of 50 to 150 pips depending on the currency that is being traded and the most popular time frame comes from using the hourly and 4 hourly charts. Swing traders can afford to be more conservative than either scalpers or day traders because they have more time for study and analysis and therefore have the luxury of waiting for several confirmations signals before they initiate positions. Because of the medium term outlook, take profit and stop loss levels are often higher and swing traders are not excessively concerned about intraday volatility in the market. Because they are concerned with medium term trends, it is possible to use this style of trading to trade currency pairs which offer higher spreads even though the liquidity may be lower.


The main advantages of swing trading are:

Better risk/reward tradeoffs: because the timeframe is longer than either scalping or day trading, the risk/reward profile is much more favorable because of the negligible impact of intraday price movements. This is why a stop loss setting of 50 pips often translates into take profit levels of 100 or even 150 pips.

Less time taken for trading: swing traders tend to rely on technicals almost exclusively, they do not need to spend much time on a daily basis in analyzing financial news and developments though they will of course keep abreast of what is happening. They can get away with this because a trading framework of a few days means that they are relatively insulated from the impact of daily news developments.

Unnecessary trades: traders who trade frequently often fall into the trap of tinkering with their positions or making unnecessary trades. Swing traders are normally shielded from such temptations because they use clear-cut trading plans with well defined entry and exit points. This disciplined method of trading also shields their trading judgment from the temporary impact of emotion.


Bullish swing trading


Prices rarely move in a straight line but form patterns which look like steps. For example, prices may go up for a few days and then down for the next few before resuming an upward movement. If there are several steps but the overall trend is upwards, it is called an uptrend. Bullish traders capitalize on uptrends by looking for an initial upward movement followed by a reversal called the countertrend and then wait for the upward movement to resume. Because they do not know how long the reversal or pull back is going to last, they will initiate a trade only when the resumption of the upward movement has been firmly established.




Swing Trading Strategy-Bullish


As the example above shows(Click On the Image to see clearly), if the price is higher than the bottom of the pullback, the trader could consider an entry provided the data is checked with the use of other indicators and a proper risk assessment. The lowest point of the reversal will constitute the stop loss level enabling the trader to exit the position if the price drops below this. The highest point of the uptrend will determine the take profit level at which at least part of the profits should be realized. It is now easy to calculate the risk/reward off the position. The reward is the difference between the take profits level and the entry level whereas the risk is the difference between the entry level and the stop loss level. In determining whether the trade is worth your while, the reward should be approximately twice the risk.


Bearish swing trading


Downtrends may not move in as clear a fashion as uptrends but they also tend to form step patterns. If this is repeated over a number of days, a pronounced move downwards indicates a downtrend interrupted by spells of price retracements and the same strategies applicable to uptrends can also be used here (Click On the Image to see clearly).




Bearish swing trading


If the price moves below the previous day’s high of the countertrend, the swing trader can consider taking a position. Once again, the high point becomes the stop loss level and the difference between the entry price and the stop loss becomes the risk. The take profit level is determined by the lowest previous point on the trend and the difference between this level and the entry level would represent the reward. Even if the price continues downwards, you should consider taking some profits at the take profits level. Once again, the trade is worth making if the potential reward is twice the potential risk.


Trading against the trend


Swing traders normally trade with the trend but some traders prefer the contrary attitude and trade the countertrend instead and the practice is known as fading. For instance, during an uptrend, you could take a bearish position near the high point of the trend because you expect the prices to reverse. Similarly, during a downtrend, you could buy shares near the low of the countertrend in the expectation that prices will execute a reversal upwards. Naturally, you would want to exit the position before the end of the countertrend and the resumption of the main trend.