Complete Guide to Forex Swing Trading

Swing forex trading is a form of short-term market speculation in which positions are held for more than one day.

It has relationships to match long-term trading patterns. But instead you are searching for much shorter moves on the market.

Swing trading is classed as a long-term form of trading. However, holding your trades for many days at a time takes patience. Swing trading is great for people who can’t track their charts all day long, or for those who can devote hours each night to analyse the market.

Swing traders use mainly technical analysis to scan for trade opportunities. In addition to analysing market dynamics and patterns, these traders may also use fundamental analysis. Swing trading normally means holding a position for more than one trading session either long or short, but generally no more than several weeks or a few months. This is a general time frame, as some trades can last longer than a few months, but the trader may still call them swing trades.

Successful swing traders try only to grab a chunk of the anticipated price change, and then change on to the next opportunity.

How do Swing Trades Work ?

Swing trading seeks to capitalise on the “swings” in the up and down price of currency pairs. Traders are trying to catch small movements inside a larger overall pattern.

Swing traders are aiming to make many small wins which add up to significant returns. For example, other traders may wait five months to earn a profit of 25 per cent, while swing traders may earn 5 per cent weekly profits, and in the long run surpass the profits of the other trader.

Many swing traders use the regular charts (such as 60 minutes, 24 hours, 48 hours, etc.) to determine the best entry or exit point. Some can however use shorter time frame charts, such as 4-hour charts or hourly charts.

Who is a Swing Trader ?

Swing traders are merely traders dealing in the multi-day to multi-week time period. In general, they work with 4-hour and 24-hour charts, and may use a combination of fundamental analysis and technical analysis to guide their decision-making.

It doesn’t really matter whether there is a long-term trend, or whether the market is mostly range-bound. A forex swing trader won’t hold on to a position long enough to make it count significantly.

Instead, the secret to swing traders is volatility. The more volatile the market is, the greater the amount of swings in short-term rates, and this creates more incentives for swing trading.

How can we Compare Day Trading and Swing Trading ?

In general, the difference between swing trading and day trading is the keeping time for positions.

Sometimes, swing trading requires at least one overnight hold, while day traders close positions before the market closes.

In general, day trading positions are limited to one day, while swing trading includes holding for days to weeks.

The swing trader suffers the uncertainty of risks such as gaps up or down against the trend by staying overnight. Swing trades are typically achieved by taking on the overnight risk relative to day trading with a smaller market size (assuming the two traders have accounts of equal sizes).

Usually, day traders have greater market sizes and can use a 25 per cent day trading margin. Swing traders also have a 50 per cent margin for trading. This means that if the trader is accepted for margin trading, they only need, for example, to put up $25,000 in capital for a trade with a present value of $50,000.

What are the Advantages of Swing Forex Trading ?

Swing trading provides a range of advantages particularly for new traders.

Swing Trading Involves Less Time

Short-term trades involve continuous monitoring. On the other hand, for most people, long-term trades may not be interesting enough, and involve a lot of trading discipline.

Swing trading appears to cater to a beginner’s mentality, mostly because it uses a more user-friendly time frame. Swing traders spend even less time analysing and trading, because they conduct fewer transactions over a longer duration.

This gives them more time to think about how to place their trades, but it also means that they just have to spend a few minutes a day trading.

Swing Trading Benefits from Longer Trends

While day trading and scalping rely on short-term unpredictability, swing traders can benefit from weekly, monthly, and yearly trade trends. Thus, swing trading will deliver better returns than day trading, as the analysis would be more robust.

Analysis conducted on longer time frames often result in better patterns, whereas short-term trading is more vulnerable to false signals. It also ensures that each trade will have more time to make a profit, owing to trades that follow longer price swings.

Swing Trading is Less Expensive

One of the biggest trading costs is the spread, or the difference between a pair of currency buy and sell price. Although spreads are a very small number, they are paid every time you make a trade, which means that ultra-short-term trading gains can be affected significantly.

The spread doesn’t really matter for swing traders, since the trades take place over a longer time, so large that a spread of a few points or pips doesn’t eat into profits significantly.

Swing Traders can Benefit From Larger Price Movements

Swing traders may take advantage of large price changes or oscillations that would be hard to achieve during a day. The more competitive the market, the greater the volatility and the greater the amount of opportunities for swing trade.

Availability of a Wide Range of Indicators

The 4-hour, daily, and weekly time spread of swing trades allow you to make the most out of the wide range of available indicators.

For example, if we take the example of a daily candlestick closing above the 20-period moving average, it is much more symbolic than the same candlestick closing on a 5-minute chart on the moving average.

Ultimately, higher time frames are more reliable, and that can help swing traders.

It is easy to evaluate multiple time units on a single or multiple graph using MetaTrader 4 and 5, where the Mini Chart indicator allows you to simultaneously view two or more time units of a single instrument.

advantage and Disadvantages of Swing Trading

What are the Disadvantages of Swing Trading ?

Requires an In-Depth Understanding of the Market

You have to understand the workings of the forex market in order to succeed as a swing trader. It is an additional advantage to have some working knowledge of economic and market dynamics.

Requires a Wider Stop Loss

Swing trading requires a significant stop loss. The stop loss should be enough to allow the trader to take advantage of opportunities.

Requires Emotional Maturity

To keep a trade for days or weeks, you must have high levels of patience and discipline, particularly when it’s not going your way. Swing trades often take a long time to move on to the positive.

Slower Potential for Growth

Unlike day trading that affords immediate returns for the trader, swing trading takes time to bring in the money. It is ideally suited for traders who have long-term investment goals.

Market Risk

As already pointed out, there is the possibility that you will lose your money as a forex trader. However, this possibility is real for both the day trader and the swing trader. While it is true that a few traders and instructors have made forex trading look really easy, there are stories of people who lost all their capital, life savings, and even the shirt on their backs due to forex trading. Which is why it is never advisable to invest money that you cannot afford to lose.

Takes a Lot of Time and Commitment

Swing trading isn’t one of the trading forms where you can enter a trade and then check it out a week later. It is live trading which needs consistent monitoring and tweaking of the strategies that work. It may be difficult to combine swing trading with a full-time job.

Taxes

Swing trading isn’t always tax-free. In fact, you could get caught up in day trader laws in the US. So first, verify if you can meet any obligations within your financial system.

Risk Management

It doesn’t matter your style of trade or the currency pair you are trading on, it could cost you dearly if you fail to execute an effective risk and money management strategy.

How Profitable is Swing Trading ?

Just like any trading form, it will only be as profitable as the trading education you are receiving on the subject.

Swing trading can, to a certain degree, be more competitive than day trading. This is purely from the fact that swing trading is consistent as opposed to day trading and market scalping.

To some degree, you can produce more long-term gains by using a swing trading strategy with which to trade. Making trading of this sort are usually more attractive for traders who may have a full-time job.

The big element for being profitable in swing trading would be the risk management used in your trading.

Other ways to make swing trading more competitive would be to add a helpful edge to help identify and trade swings. One way to do this is to make use of moving averages.

What are the Best Instruments for Swing Trading ?

The great news is that all CFD instruments, including forex, indices, commodities and even stocks, can use this type of trading.

Swing trading in the forex market enables traders to take advantage of excellent liquidity, and ample volatility to get interesting price moves, all within a relatively short time frame.

Some of the most common forex swing trading currencies are:

  •     Euro: Pairs include the EUR/GBP, AUD/EUR, EUR/CAD, and EUR/JPY
  •     Japanese Yen: Pairs include the USD/JPY, JPY/GBP and JPY/CAD
  •     British Pound: Pairs include the GBP/AUD, GBP/CHF and GBP/CAD
  •     US Dollar: Pairs include the EUR/USD, USD/CAD, AUD/USD and NZD/USD
Best Instruments for Swing Trading

How to Start Swing Trading in Forex ?

Now you’re more familiar with what swing trading is, and how to do it. Your next step is learning about swing trading and what advantages it can bring to you as a trader.

One of the top advantages with a swing trading strategy is that testing your charts typically takes only a few minutes each day. This takes away the long hours of looking at the charts, like with a trading day approach.

Plus … you’ll have more time with swing trading when it comes to actually placing your orders, then if you’ve been scalping up the markets.

Swing traders can look for actionable trading opportunities using the following strategies:

Fibonacci Retracement

Traders can use a Fibonacci retracement to define support and resistance levels. They are able to find market turnaround opportunities based on this indicator.

It is believed that the retracement levels of Fibonacci of 61.8%, 38.2%, and 23.6% show possible levels of reversal. A trader may enter a buy trade when the price is on a downward trend and tends to find support from its previous high at the 61.8% retracement point.

T-line Trading

Traders use the T-line on a chart to decide the best time for entering or exiting a trade. When a trade closes above the T-line, it’s an indicator that the price will keep rising. When it closes below the T-line, this is an indicator that the price will keep falling.

Japanese Candlesticks

Since they are easier to understand and read, most traders tend to use the Japanese candlestick charts. Traders use different patterns of candlesticks to define opportunities to trade.

How to be a Good Swing Trader in Forex ?

Some of the best forex books leave out some of swing trading’s top tips and secrets, such as :

Utilise the News

Markets are constantly changing in response to news happenings. Most resources, such as CNBC and Yahoo Finance, can use volume, price action and weekly charts to provide market insight and commentary.

The news could thus help you illustrate possible options and dividend stocks on which to keep an eye. It could help you to schedule your entries and exits, too.

Find the Right Broker

Everyone has different needs and goals, and the right broker and exchange will play a vital part in helping you achieve your trading goals. Also remember they are more than a place to find quotes and stock exchange. They will help you create a watchlist, portfolio and more.

Keep on Learning

The key to being successful from a commercial perspective is to have an untiring and never-ending and voracious appetite for knowledge and information. A wealth of information is available to assist you in designing successful forex strategies.

Keep a Journal

Keeping a log can be invaluable. Just note down position, date, size and a reason for entry and exit points. It could help you see why, for example, your currency pair breakouts strategy doesn’t fit on weekly charts.

How to Manage Risk in Forex Swing Trading ?

One thing you may have learned about forex trading is that most traders are losing money. This is true also for successful traders.

The reality is that no investor wins 100% of the time. At times you misjudge the market, at times it changes suddenly, at times you might just make a mistake. That’s where risk and money management are so critical.

You have to learn how to lose in trading, but particularly in forex, before you know how to win. And while we’re thinking about losing, you should know how to lose little to win high.

Essentially, if you are able to handle your trading risk, you can close the bad trades early, which will help ensure you make more profits than losses.

Some tips for managing your swing trade risk include:

Define Your Acceptable Maximum Loss

While you certainly want to make a profit on your next trade, it’s important to understand the maximum amount you’re willing to lose on a trade.

When you know that number, you can set a stop loss to automatically close your trade if it goes too far in the wrong direction. This will help protect you when you are not able to watch every trade manually at your computer.

Don’t Risk all on any one Trade

Regardless of how much is in your trading account, you should avoid risking all of your money on a deal. If you do, you will probably lose everything. A good rule is not to risk more than 2 per cent of the balance of your account on any exchange.

Although you might open an account with as little as $200, it’s safer to start with a larger amount. This ensures you’ll have enough to trade a range of currencies on your account and diversify the risk of swing trading.

Swing trading is a long-term investment strategy by nature, so you need more room in your positions to handle market volatility.

Know Your Risk Profile

When you start trading, one of the first things to do is consider your risk quotient and volatility. In other words, at what stage of the loss are you going to start to panic?

If you have a $10,000 account balance and you lose $1,000, you’ve lost 10% of your money. Would that collapse your universe, or would you find that normal? The way you react to this loss can affect the risks that you are willing to take in the trade.

A swing trading strategy is, as you have already learned, a medium- to long-term trading strategy. It’s a strategy that is highly dependent on risk management and its resources, usually called money management in trading.

What are the Indicators Used in Swing Trading ?

Moving Average

The first is the moving average where the emphasis is on trend detection and/or trend confirmation.

The easiest moving average indicator to use is the simple moving average. It demands that all the closing prices be applied for a certain number of days, then that the sum be taken and split by the same amount.

The average can be plotted on a graph so that one can understand what’s going on with the market price.

Relative Strength Index

You can select from the second indicator which is among the best technical indicators for swing trading to assess the best positions in the forex market for swing trading. This is the RSI that stands for the relative strength index.

This indicator assists in presenting information which is suitable for market entry. It helps, under a certain assumption, in examining short signals. This is the reason that the market may be overbought or oversold. It’s an excellent strategy when both the demand and range bound have proven flat.

Visual Analysis Indicator

Technical indicators offer a wealth of knowledge, but often research with a visual pattern is much easier.

This makes it much easier to see what’s going on in the market and to direct your decision, hence, the third predictor for swing trading, the visual analysis indicator.

How to Know if Swing Trading Right for You ?

Swing trading is right for you if :

  •         You don’t mind keeping your trades for several days.
  •         You’re able to do fewer trades, but you’re more vigilant to make sure that your trades are good.
  •         You don’t mind using large stop losses.
  •         You are patient.
  •         You can remain cool when trades do not move in your favour.

Swing trading may not be right for you if :

  •         You like action-packed, fast-paced trading.
  •         You lack patience and you want to know instantly whether you’re right or wrong.
  •         When the trades go against you, you get sweaty and anxious.
  •         You can’t waste any hours studying the markets every day.

If you have a full-time job, but enjoy trading side by side, then swing trading may be more of a style for you.

Final Thoughts

While different from day trading, feedback and results indicate swing trading could be a neat method to start with for beginners. This is because intraday trading will prove too hectic in dozens of securities, whereas swing traders will see their returns within a few days, retaining high motivation rates. At the same time, swing trading is quick enough to avoid disruption versus long-term trading.

What’s more, the requirements are small. You need a brokerage account and some cash, but after that you can find all the online help you need to try to make some profit. In addition, swing trading can be successful on a large number of markets.

Yet, while it may be fairly easy to learn how to start swing trading as a part-time or full-time job, your capital is at risk. Caution therefore must be taken at all times.

FAQ's

How much money you’re going to need depends on the strategy that you’re using, which then determines how much you’re losing per transaction and the size of your place.

There is no minimum requirement of capital to become a swing trader in stock. Day traders (defined as making more than four trades a week that are opened and closed within the same day) are expected to maintain a balance of $25,000 in their account, but that’s not a swing trader’s requirement. Only make sure you don’t end up doing a lot of day trading, or you will be subject to the minimum.

Therefore, the capital you need is related to your position size, account risk and trade risk.

As a simple rule of thumb, with at least $5,000 to $10,000, you can start swinging. When you fall below these balance sheets, you end up losing too much on any trade.

Swing trading is an easy strategy because it is similar to how you will behave on the market and it rewards you for being less involved and doing less trading over time, which is exactly what you need to do if you want to have some chance of success.

Swing trading accumulates profits and losses more gradually than day trading, but you can still have some swing trades that lead to big gains or losses quickly.

In general, day-trading has more potential for benefit, at least on smaller accounts.

In general, daily bars are the best time frame for swing trading. And while trade in other time frames can swing, the daily timeframe has some very big advantages which make it a good choice for almost any trader.

Shift traders can make a wide variety of incomes. Most swing traders will still need to work another job to support their lifestyle, but will be able to pull out of the market a secondary income every month. Then there are swing traders who are comfortable solely based on their earnings from trading.

Finally, there is the tiny number of swing traders generating very high (and consistent) revenues. The flip side of this is that a huge number of want-to-be traders are going to struggle and never make any money.

That said, as a swing trader, how much money you make is essentially dictated by:

  •         How much money you start with
  •         How much you trade, how much you win, and the value of your successful trades compared to those you lose
  •         How much time and effort you spend on your forex education

MACD is an acronym for Moving Average Convergence Divergence. This indicator is a tool used to determine moving averages which indicate a new trend, whether it is bearish or bullish. After all, being able to identify a pattern is our top priority in trading, since this is where the most money is made.

MACD is designed to illustrate shifts in the strength, momentum, direction and length of a trend in the price of a stock.

Swing traders keep a particular stock for a period of time, usually a few days to two or three weeks, that is between those extremes, and will trade the stock on the basis of its intra-week or intra-month changes between highs and lows, but the average is usually three weeks.

The relative strength index, or RSI, is one of the main statistical metrics for swing trading.

This indicator will give you the details you need to decide when an ideal market entry could be. It allows for a good analysis of short signals.

A swing chart is a chart that shows the up and down of price movement of a minimum size, no matter how long it takes. Swing charts work rather just like the breakout system. A new high after many days is a buy signal, while a sell signal happens when a new low is made after many days.

A Fibonacci retracement is a common instrument among technical traders. A Fibonacci retracement is created in technical analysis by taking two extreme points on a market chart and dividing the vertical gap by the main Fibonacci ratios of 23.6%, 38.2%, 50%, 61.8% and 100%.

They are typically actively traded stocks which are close to a key level of support or resistance. Swing traders will check for various types of patterns designed to predict breakouts or breakdowns, such as channels, triangles, Fibonacci levels, Wolfe Waves, Gann rates, and so on.

Yes, swing trading is better than day trading and the explanation is clear! An investor joins and leaves a variety of positions in day trading to make money from minor market fluctuations. By comparison, swing trading means holding stocks for longer periods of time, say from days to weeks, and this could mean lesser opportunity for loss to an experienced or skilled swing trader.