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Swing Trading

The Ultimate Guide for Forex Trader

Good trading is a peculiar balance between conviction to follow your ideas and the flexibility to recognize when you have made a mistake.”

Michael Steinhardt

Swing trading DOES NOT mean entering a trade then swinging on a rope like Tarzan, it is more intricate than that.

Swing Trading is one of the three main trading styles available to traders.

New traders coming to the markets are often misled into thinking that day trading  is the surest way to make money in forex.

This is far from the truth. Matter of fact, day trading often can easily lead to a trading disaster for an un-experienced trader

There is no need to despair though, all is not gloom, the alternative to day trading is…

The Swing Trading

There are three main trading styles from which a trader can choose his or her preferred trading style. These include:

  1. Day trading
  2. Swing trading and
  3. Long-term investment

Although this article advocates for swing trading, let me tell you upfront that swing trading is not for everyone.

Your aptitude, patience levels and personality must match the demands of this trading style

Having said that, let me add and say

Every trader MUST choose a trading style that agrees with his or her personality.

As you will learn in this article, trading styles are not chosen based on a coin toss, they are chosen based on a process of careful consideration of factors which I will highlight in this article.

But first,

What should you expect to learn from this article?

In this ultimate guide to Forex Swing Trading, we will answer:

  • What is swing trading in Forex?
  • How can we compare day trading and swing trading?
  • Why swing trading is far much better than day trading?
  • What are the best swing trading strategies?
  • What are the best indicators for swing trading?
  • What are the best time frame for swing trading?
  • Discuss the ultimate swing trading course
  • What are some of the best Forex Swing trading books

 

 

Let’s jump right into it

So

What is Swing Trading in Trading?

Investopedia defines swing trading as

“A trading style which aims at capturing gains made in the movement of a financial asset (currencies, stocks, indices, options and bonds) overnight to several days or weeks. Simply put, swing trading requires that you hold your trade for more than one day.”

Consider the illustration above for swing trading, you get the idea, right?

Next,

Let us briefly look at the difference between Day Trading and Swing Trading

Day trading vs Swing trading

The main distinguishing feature between swing trading and day trading is the holding position time. For day traders, they tend to get in and out of trades within the same day. Conversely, swing traders hold their trades for at least one night.

Day traders have the luxury of setting their stop losses a few pips from entry, swing traders must have wide stops to avoid being stopped out during periods of fluctuations in price and volatility. However, swing traders stand a chance of gaining more than day traders when trades go their way.

Consider the chart below:

 

As you can see from the above example, assuming that you hit the buy button at the point indicated and took your profit intraday at the close of the day, you would have made 78 pips and left close to 100 pips on the table.

Yes, swing trading which would have run for three days would have earned you 172 pips, isn’t that amazing?

Why is Swing Trading Better than Day Trading?

To determine which is better, let us look at the pros and cons of each

Pros and Cons of Day Trading

Pros

  • You can make quick gains daily if you have a winning strategy.
  • You need not to understand underlying mechanics of economics and financial markets as trading is mechanical

Cons

  • Huge time commitment and screen time needed
  • You risk leaving lots of pips on the table
  • You cannot capitalize on major market moves because of watching shorter time frames
  • High transaction cost that results from high trading frequency.

Pros and Cons of Swing Trading 

Less risk 

Most of the trades taken by swing traders are taken from a swing point, say buying from a swing low with stop loss a few pips below the previous swing low. The trader will be able to get out of the trade is the trade goes against him long before it hits the stop loss.

Cheaper in transaction fees 

Considering that the trades are taken for days or even weeks, you only get to pay the spread once. Unlike a day trader who takes five USDCAD trades during a trading week, a swing trader who takes one trade at the beginning of the trading week and stay in until the close of the week will spend lesser in transaction fees.

Possibility of earning interest in form of positive swap

Swap is the interest fee that the broker pays you (the trader) or charges you at the end of every trading day. If you hold trades with positive swap (those that earn you interest) you can get to enjoy the additional bucks paid to your account. Here  is a list of currency pairs with positive swap.

Potential for large gains 

Compared to day trading, you stand a unique chance of scoring big and making lots of pips if you catch the market at a crucial reversal point. Say for example, you catch a monthly reversal and hold the trade for three or four weeks and it happens to go your way, you will make some cool bucks.

Less time is needed to analyse and manage an open position

Depending on the time frame in which you have taken the trade, you might require lesser time to check how your trade is doing.  Those who trade on the four-hour time frame can check their trades after the close of the daily candle while those trade on higher time frames can check their trades on daily time frames.

Opportunities to scale in

You have heard the common saying, always add to your winners never your losers. Well opening new positions is only possible if you have sufficient margin. You can use the margin guaranteed you by the open positions which are in profits to open new positions.

Cons

Requires in-depth market understanding

You must understand how the market works. Having some working knowledge of economics and market dynamics is an added advantage.

Wider stop loss is needed

Swing trading requires a wide stop loss. The stop loss should be sufficient to allow the trade room to breathe.

Requires emotional maturity

You must have high levels of patience and discipline to hold a trade for days or weeks especially when it is not going your way. Sometimes, swing trades take long to move to the positive.

Slower growth potential 

Unlike day trading which affords the trader instant returns, swing trading takes time to bring in the money. It is best suited for traders whose investment goals are long term.



Our verdict

Clearly, swing trading beats day trading in the sense that the trader does not need to be glued to the screens all day long and has a higher earning potential than day trading.

Now let’s get on to the good stuff!!

What are the Best Forex Swing Trading Strategies

For swing trading, the very best trading strategies to use are those that are in line with the trend. In my previous article about forex trading, I mentioned that the market moves in a cyclic manner or in waves. The market moves up, down and sideways. A trend is when the market is moving up or down and a range is formed when price overlaps within a tight zone trading sideways.

Having said that, I have come to learn, from experience and years of chart work that trend following strategies are best for swing trading.

Let’s now look at some of these trend following strategies

Swing day trading strategy

This trading strategy is named thus but it does not mean that the trades are taken and exited on the same day.

Swing day trading strategy is all about vigilance!

The trader needs to be on guard to notice a correction in a trend and then be ready to catch the ‘swing’ out of the correction and back into the trend.

The patterns can easily be seen on an intraday chart. Take an example of GBPJPY on the four-hour chart

As you can see, the market has been in a steady downtrend, it took a brief rest period where it corrected the move by price moving opposite to the main trend and then it resumed with the downtrend.

When a swing trader sees the market forming such a corrective structure, he or she should lay in wait for price to break outside of the corrective structure and swing the trade.

How to trade it

Wait for price to break outside of the corrective structure (marked as “correction”) and enter the trade with the stop loss a few pips above the corrective structure.

As I have marked with the blue lines the price even contracted to a daily move of only 20 points!

A swing trader would be on HIGH ALERT here! Contracting price, lots and lots of overlap.

This presented a very high probability that the price was going to continue in the trend that had started the previous week.

The trade would involve selling when the first candle moved below the contracting range of the previous few candles,

A stop could be placed at the most recent minor swing high. ( Orange Arrows )

Another example of a swing trade is shown in the chart below.

Role Reversal Trading Strategy

This trading strategy is founded on the support and resistance trading strategy. As the market moves, price hits a point beyond which price tends to be rejected.

When price moving up hits a point where it seems to be rejected, that point becomes a ceiling or what we commonly call resistance.

Similarly, when price moving down hits a point and bounces off, that point becomes a floor or what we commonly refer to as a support.

Now,

We all know that support and resistance get broken at some point. Right?

When this happens, broken support becomes resistance and broken resistance becomes support?

You follow?

Perhaps let’s make it a bit clear with the help of a diagram

 

 

Now looking at the figure above, this is what we call role reversion; that is support turned into resistance and in some cases resistance can also turn into support.

Point to note: Support and resistance is NOT a line but a zone

How to trade it

Once the price is making higher highs and higher lows we call it uptrend. Technical trader must assume the price is going to go up forever and only long trades should be considered.

Once the uptrend is defined, the lowest strategy to trade is – buy on pullbacks.

As per definition of an uptrend, the price punching through the resistance and pullback before it makes another higher high.

“Role reversal” concept comes handy for bulls in this scenario.

 

 

Momentum Reversal Strategy

This is one of my very best trading strategies. I have managed to trade this on live market conditions.

With this swing trading strategy, I was able to make an annual return of 58% in 2017.

Click here  to learn more about this awesome swing trading strategy.

Best Forex Pairs for Swing Trading

I get asked this question very many times, as in what are the best currency pairs for swing trading. My answer has remained the same over the years; you need pairs that have definite trends.

Pairs whose trends can be established and once they start trending, they stay in their trend for some time.

Well, from experience, I have noticed that Majors and some crosses make the best swing trading pairs.

You may be asking, why is this so?

The answer can be summarised in one word; volatility.

Majors are volatile because they are affected by decisions made by central banks. 

Crosses are volatile because their movements are affected by the movements of the majors.

Compare these charts

This is a chart for NZDUSD, as you can see the pair has established trends that can be seen on the chart.

This second chart is for EURCHF. As you can see the market is choppy no definite trend. This pair is not ideal for swing trading.

Best Technical Indicators for Swing Trading

It is important for you to understand that not all indicators are suited for swing trading. You need to choose those that work best and avoid those that don’t. Here are some swing trading indicators that I use

Moving Averages- I use these as they show where the trend is

Support and Resistance- These zones reveal important levels where market turns.

Commitments of traders’ indicators These help me to see where the smart money is putting their money in the long term.

Note: Avoid using Bollinger Bands and average directional index (ADX) which are suited for range-bound trading.

Best Time Frame for Swing Trading

Since Swing trading is a long-term strategy, it works best in daily and weekly time frames. You can easily spot trends on these charts. Consider the chart below

The first chart has been taken from NZDUSD on a lower time frame (H1) no definite trend can be seen. Now compare that with its daily chart

This second chart below, is taken from NZDUSD on the daily time frame, you can clearly see that the trend is down. Have a look

Noticed the difference between the two charts?

Forex Swing Trading Books

You can learn more about swing trading from these awesome books

Swing Trading for Dummies This book explains how you can use technical and fundamental analysis to swing trade with good success.

Take advantage of price swings in strongly trending securities and pump up your portfolio! Want to know the strategies of successful swing trading?

 

How to swing trade -This beginner’s guide is designed to introduce the swing trading style to beginners helping them trade the markets with a good level of success.

Swing trading is a type of trading in which you hold positions in stocks or other investments over a period of time that can range from one day to a few weeks or more.

 

The 5 Secrets To Highly Profitable Swing Trading – In this guide, the author presents five key secrets that can be employed by anyone to successfully swing trade.

“The beauty of swing trading is that it provides many signals. You don’t need to risk a lot per signal. You won’t second-guess yourself whether to take a signal or not.

One trade is not going to make your year or your month, but it also won’t ruin it”

 

Swing Trading Using the 4-hour Chart 2: Part 2: Trade the Fake! – In this book the Heikin Ashi Trader explains how traders can use the 4 Hour chart to profitably swing trade the markets.

In the second part of the series “Swing Trading using the 4-hour chart” the HeikinAshi Trader  speaks about the phenomenon of stop fishing and Fakeouts as well as the many deceptions that  major players and algorithms stage in today’s financial markets.

 

 

Conclusion

There you have it.

I hope that this article has answered some of your pressing questions concerning swing trading. Now let us wrap it all up by reiterating that you need to settle for a trading style that fits your personality.

Swing trading beats day trading in that it enables you, the trader to spend fewer hours per day analysing the markets. You also stand a chance of earning interest when you hold your trades for more than one day.

However,

to be a successful swing trader, you should be willing to have a wide stop loss, wait longer to close your trades and control your emotions. By and large, the rewards for swing trading far outweighs the few drawbacks of this amazing trading style.

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