Swing trading is a style that operates over short to medium time frames.
It lies between the very short time frames of day trading and the longer time frames of position trading:
It's not so short that it commits all your time to monitoring the market.
Yet it is short enough to provide plenty of trading opportunities.
You can get an overview of the style in What is Forex Swing Trading.
Today we are going to dive deeper into swing trading strategies, to illustrate the risk factors and benefits involved.
We'll start by looking at a few simple Forex swing trading strategies, then investigate how to build more complex versions.
And remember that this is not our only educational resource for learning swing trading strategy:
...our cost-free webinars cover this topic and many more.
Swing trading is a style, not a strategy.
The time frame defines this style and within that, there are countless strategies we can use to swing trade.
These concepts give you two choices within your swing trading strategy including to:
Counter-trending strategies look to profit when support and resistance levels hold up.
Trend-following strategies look for those times when support and resistance levels break down.
For either type, it's useful to have the ability to visually recognise price action.
A quick word on price action:
...markets don't tend to move in a straight line.
Even when ultimately trending, they move up and down in step-like moves.
We recognise an uptrend by the market setting higher highs and a downtrend by lower lows.
Many swing trading strategies involve trying to catch and follow a short trend:
...but we will also look at trading counter to the trend.
Look at this hourly chart of EUR/USD.
The chart shows an uptrend that lasts around a week and it moves with a typical zig-zag pattern.
The price rises for a few hours and then is interrupted by some periods of decline.
After this, the upward progression continues.
These steps combine so that the overall movement is higher.
Generally, we are seeing higher highs being achieved.
The lows are also generally rising.
Though the overall trend is up, there is a stretch in the middle (from early on 12 July through to 10.00 on 13 July), where there is a pullback or reversal.
During this period, the market is not setting new highs while the lows are moving lower and lower.
After this countertrend period, the upward trend resumes.
So with this eyeball method, we are looking to catch the bullish swing:
...but only when we are confident that it is going to continue.
How long will a pullback persist?
We have no way to know.
Instead we look for confirmation that the market has gone back to its original trend.
In other words, we:
The tell-tale signal that we are seeking, is a resumption in the market setting higher lows.
This suggests the pullback is over.
So we would be buying EUR/USD around 16.00 on 13 July.
At this point we've seen the market setting increasingly higher highs:
...and just as importantly…
...we've seen the lows of each period also rise.
Let's say we buy in at 1.1082.
Our first version of this strategy places a stop-loss at the lowest point of the previous countertrend.
This level was struck at 10.00 on 11 July and was 1.1042.
So our stop goes at 1.1042.
We are risking 40 pips.
The strategy is simple and aims for a risk-reward ratio of 1:2.
We are risking 40 pips, so we place a limit 80 pips higher at 1.1162.
This price is reached between 14.00 and 15.00 on 14 July, when the market hits a high of 1.1164.
Your limit is filled and you make a profit of 80 pips.
A second version of this strategy would try and run the profits even further.
In the second strategy, we do not set a limit.
Why don't we use a limit?
Because we want to run our profits for as long as we can.
We don't know how long the trend might persist and we don't know how high the market can go.
So we will not try to make a prediction by setting a price target.
But we do know that prices don't go straight up.
This means you have to allow the market to move adversely to some degree, to properly ride the trend.
This also means when the trend breaks down, you will have given back some of your unrealised profits before you close out.
Rather, than use a limit, we will place a stop at the low of the last 20 time periods.
We never move this stop further away:
...but if the 20-hour low is higher than our previous stop...
...we raise our stop to the 20-hour low.
Very broadly, this means our stop is trailing the trend.
The chart below shows that we would get stopped out using this strategy, when the price dips sharply at 16.00 on 15 July.
The 20-hour low that defined our stop, would at this point have been 1.1097.
We bought in at 1.1082 and are stopped out at 1.1097.
We make a profit of 15 pips.
This is less than we made with the first strategy, but aiming to run your profits in this way can yield high profits when a trend persists.
These occasions tend to be infrequent.
Want to know the good news?
In the long run:
...with the right risk management…
...the profits should outweigh the losses incurred from those times when the trend breaks down.
Our third swing trading strategy is more a countrending trade and therefore does the opposite of the first two.
We use the same principles of trying to spot relatively short-term trends building:
...but now try to profit from the frequency with which these trends tend to break down.
Remember that as noted earlier:
We also saw how an early part of a trend can be followed by a period of retracement, before the trend resumes.
A counter-trend trader would try to catch the swing in this period of reversion.
To do so, we would try to recognise the uptrend pattern.
Then when a fresh high was followed by a sequence of failures to break new highs - we go short in anticipation of such a reversion.
When counter-trending, it is very important to maintain strong discipline if the price moves against you.
If the market resumes its trend against you, you must be ready to admit you are wrong and draw a line under the trade.
All our strategies so far, are very simple.
They count on our ability to recognise and understand price action.
What can we do to improve our strategies?
Well, there are several things we can try.
The first is to try to match our trade, with the long-term trend.
Although we were looking at an hourly chart, it can help to also look at a longer term chart - to get a feel for the long-term trend.
Try and trade only when your direction matches what you see as the long-term trend.
Another way to improve your strategy, is to use a secondary technical indicator to confirm your thinking.
...if you are a counter-trender and thinking of selling…
...check the RSI and see if it signals the market as overbought.
A moving average (MA) is another indicator you could use to help.
An MA smooths out prices to give a clearer view of the trend.
And because an MA incorporates older price data, it's an easy way to compare how the current price compares to older prices.
The chart above shows the:
This is overlaid on the EUR/USD chart that we looked at earlier.
We can see that the quicker red MA line is above the slower green MA line, when we took our long position in the first two strategies.
A shorter MA being above a longer MA, is usually seen as a confirmation of an uptrend.
An MA is just one of the many powerful but simple-to-use indicators, available with MetaTrader 4 Supreme Edition.
We've looked at some entry and exit strategies for swing trading.
But it's important to note that a complete swing trading system, will also incorporate good money management and identify suitable markets.
Some other good practices are to: