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Forex Swing Trading: Advantages and Disadvantages

Forex swing trader

Forex is a hugely diverse market, and there are many different ways to squeeze a profit from it. Alongside a large variety of strategies available, there are also different trading styles. You are best off trying to match your style of trading, to your own needs and preferences. One of the main variations in trading style is the time frame in which you operate.

This article is going to focus mainly on swing trading, which is a medium-term style. Bear in mind, there is no law that says you always have to trade the same way. So feel free to pick and choose whatever benefits you the most.

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But before we move on to look at the swing trade in detail, let's run through some of the differing time frames that traders commonly adopt.

Time Frame of Traders

Long-term position players sit on the longest end of the spectrum. These are often traders looking to follow extended trends, which can last months or even years.

One of the advantages of long-term trading is that it offers the potential for large profits. Successfully following a trend for several months will normally outweigh what can be achieved in the short term.

There's more. Long-term trading systems will often not require much attention beyond a small amount of monitoring each day. But they do require a lot of patience and will likely only offer infrequent opportunities to trade.

On the shortest end of the spectrum are scalpers. Scalpers place ultra-short trades and are only looking for small price movements before exiting. They are just trying to gain a pip here and there.

There is an advantage to the extremely short length of these trades. Namely, you curtail your exposure to the market. It gets better too. Because you are only looking for very small price movements, opportunities for trading are plentiful.

The downsides include:

  1. a huge commitment in time and attention;
  2. the requirement for extremely well-run and disciplined exit management;
  3. transaction costs can be significant because of the high number of trades.

Day traders work the time frame not covered by scalpers and long-term position players. These are still very short-term traders who may only hold a position for a handful of hours. A day trader may use a variety of methods, but will not hold a position beyond the end of the day. This means they avoid exposure to any market-moving stories that break overnight.

In between day trading and long-term trend-following, sits the world of Forex swing trading. Many people find swing trading to be a natural fit because it offers an acceptable compromise between frequency of trades and the associated time demands.

What is Forex Swing Trading?

Swing trading has similarities to long-term trend following, but you are looking for much shorter market moves. A swing trade tends to last more than a day, but may run for anything up to a few weeks. The swing trader is essentially looking for multi-day chart patterns. Why?

To try and attain bigger price moves or swings than you would typically get from a day trade.

The time frames used on a chart by an FX swing trader might be as small as five minutes or as large as an hour. A swing trader may use a combination of fundamental and technical analysis to guide decisions. Whether there is a long-term trend or whether the market is largely range-bound doesn't really matter. A Forex swing trader is not going to hold on to a position long enough for it to count significantly.

Volatility makes a difference though. Volatile markets tend to suit swing traders best.

The more volatile the market:

  1. the greater the number of short-term price moves; and therefore
  2. the greater the number of opportunities to place a swing trade.

Swing trading is well suited to the Forex market for a number of reasons.

Swing trading Forex pairs means:

  1. you benefit from excellent liquidity; and
  2. there is sufficient volatility to get interesting price moves; in
  3. a relatively short time frame.

As noted, extremely short-term trades require constant monitoring. Long-term trades may not be active enough strategies for most people and require a lot of discipline. Swing trading tends to appeal to the mindset of a beginner, simply because it uses a more user-friendly time frame. If you are a beginner and you would like to test swing trading, feel free to try it risk-free with our cost-free Demo Account.

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Forex Swing Trading Explained

With a swing trade, you are trying to make a return on your investment from reasonably short-term high and low moves. To do so, you need to study such market moves and find patterns that you are able to exploit. Look at as many currency pairs as you can, for example, volatile moves over your time frame of choice. Try and identify commonalities to the moves. What kind of conditions are in place when these moves occur?

Also look at how the price moves end. Think about the optimal way to get out of a trade in such conditions.

Remember that swing trading is a style of trading and not a strategy in itself. Many different indicators may be appropriate for this style of trading, particularly any effective trend-following method.

Let's look at an example, to see what price swings can occur and what risks we might face. You will need to look at a lot of charts in order to establish what method you finally take.

The indicator itself isn't particularly important for the purposes of our example. We are more interested in exploring the time frames involved.

Therefore, we are going to use the following trend following technique. As it comes to swing trading MT4, you can access a variety of trend-following indicators with MetaTrader 4 Supreme Edition, alongside other powerful analysis tools.

This an hourly chart of GBP/USD.

GBPUSDH1 swing trading

The method used here for identifying which market move to follow is not at all complicated. It uses two moving averages (MAs), one short and one longer.

An MA is a continuously calculated arithmetic mean of the market price, for a specific number of periods. We are going to use a short-term MA crossing over a longer MA. As an indication, we may see a price swing in the direction of the cross. Along with this indicator as our entry signal, we will use basic placement of stops and limits as our means of exit.

In the chart shown, the dotted red line represents the moving average over the last 25 hours. The dotted green line represents the moving average over the last 100 hours. When the dotted red line crosses the green line, it suggests we might see a price swing in the direction of the cross. When does this happen?

The dotted red line (shorter MA) crosses above the dotted green line (longer MA), on 17 June at about 04:00. We would buy here, looking for the upswing in the price to continue. Note that the upswing has already begun before we get our signal. This is the way moving averages work. They are lagging indicators.

We go long GBP/USD at 1.4280. Let's place a stop-loss 200 pips away, with a limit 600 pips away. We will trail the stop 200 pips with the swing. As you can see from the chart, the upswing did indeed continue. Our limit at 1.4880 would have been filled on 23 June. This was around 13:00, when the price went as high as 1.4959…and would eventually top out a little above 1.5000, as we move into 24 June. We made 600 pips, which is a healthy profit for a trade that lasted just under a week. The example is a little guilty of curve fitting. To get a proper idea of the effectiveness of the method used in the example. you would need to backtest it against many hundreds of charts.

Now, what would have happened if the limit was further away? Or if we had attempted to follow the upswing further by not using any limit? There was a nasty twist waiting around the corner. We must always be wary of the potential for price shocks. This is why you should always adopt good money management. Our example actually gives us a perfectly good example of a price shock. If we extend the chart onward a little, you will see why.

GBPUSD H1 Swing Trade

In the early hours of 24 June, the results of the Brexit vote began to become clear. What was the upshot? The value of the pound plunged.

Had we still had our position:

  1. we would have been caught long and wrong;
  2. the speed of the decline would have meant our stop-loss would have been of limited use.

There was a drop of several hundred pips in under a minute. If you are the wrong way round in such a circumstance, it helps to have used good money management. If your position is sized correctly versus your risk capital, it allows you to weather the storm. It's important to live to fight another day.

Read our list of Top 10 Forex money management tips to learn more on the subject.

Getting the Swing of It

Swing trading is a style suited to volatile markets, and it offers frequent trading opportunities.While you will need to invest a fair amount of time in monitoring the market with swing trading. The requirements are not as burdensome as trading styles with shorter time frames. Again, swing trading is not right for all traders - so it's best to practise with it risk-free first, on a demo trading account.

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