Swing trading in the trading is all about capitalizing on sudden, and brief, price spikes — either higher or lower, in a currency pair. This is accomplished by spotting sudden movements that seem to indicate that emotional trading, (which is a no-no for you), is strongly pushing the price of a currency pair in one direction or another so that it will temporarily break past a typical resistance point.
Swing trading attempts to capture gains from the price movement of a currency pair within two to seven days. Traders use technical analysis (as opposed to fundamental analysis)and oftentimes, market sentiment analysis to look for currency pairs exhibiting short-term price momentum.
These trades look to capitalize on short-term price trends and patterns instead of the usual long-term trends.
When swing trading you are looking to make a U-turn on a trade at a particular point. It is often confused with reversal trading, but unlike that strategy, swing trading is only an action engaged in for a short period of time, whereas reversal trading looks for a change in trend.
Video: What is Swing Trading
The only way to have any effective swing trading strategy is to understand support and resistance. Support is that price beyond which, historically, a currency pair’s price has difficulty falling under. Resistance is the opposite, and thus it is that price which a currency pair, historically, has difficulty breaking past in an upward motion.
Whenever a support or a resistance level is broken, it possibly means the start of a new trend. These times are known as “breakouts” and they mean that new upper and lower limits for that pair’s price are going to be set. But, what swing traders are looking for is not a new trend. They are looking for indications that there is emotional trading going on in a heavy way, and this emotional trading has temporarily either lowered or raised the price of a currency pair to an unsustainably low or high level.
The swing trader will seek to enter into a position to let him /her profit in a short period of time. Traditionally, a swing trade Forex position is only maintained for two to seven days.
Swing traders look to technical analysis for their predictions. They have little interest in what is known as “fundamental analysis”. With technical analysis, they analyze the historic trends in a certain currency pair’s price movements. This analysis will include recent, short term, and long term (up to three years back) research.
If the swing trader notices what seems to be an anomaly manifesting in price movement, he then may turn to some quick market sentiment analysis. A common part of market sentiment analysis for the Forex trader is looking at “open interest.” Open interest simply refers to the number of contracts that are open but not exercised on a given day.
Basic Strategies for Swing Trading:
- Learn and utilize the stochastic and the RSI (Relative Strength Index) indices.
- Make your swing trading strategies as simple as possible. Never make them more complicated than they need to be, and never take up any strategies that seem too complicated for you to easily understand. If you can’t understand the basics of a Swing Forex trading strategy intuitively after a little bit of study, then you don’t want to use it.
- When you find yourself trading into resistance which is at a market high, seriously consider using the stop reverse technique on a break-out. The reason behind this is that the major Forex market trends begin when high resistance barriers are breached. You could capitalize on new trend followers and the stop-loss orders being executed.
- Be ready to take profits. Do not hesitate, trying to feed your greed. Once you have made a profit that is within your anticipated price movement range, take it immediately. The Forex market is so volatile that profits vanish too quickly for hesitation. Small profits add up to big profits.
If you want to see the three best indicators to use for swing trading check out our post here.