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A Dive into Swing Trading

8:04 AM Nov 25, 2019
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Forex trading

How many decisions do you have to make before you open your first trade on Forex? Which trading pair to choose? What market analysis to use? Which trading strategy to pick?

The last question is probably the most difficult one because there are dozens if not hundreds of strategies. Let's start with something simpler and determine at least the trading style you might use. This list is much smaller:

  1. Scalping
  2. High-Frequency trading
  3. Position trading
  4. Day trading
  5. Swing trading

It’s much easier to choose out of five variants only, right? Let's focus on swing trading today. We will take a look at its pros and cons, walk through the trading method itself, and figure out if this style suits you or not. Let's get started.

What Is Swing Trading?

From the title, you can already guess that in swing trading you open your trades based on the price movement or the swings of the price. The purpose of this style is to open a trade when the price moves up or down and hold it until the market reverses.

Of course, it would be perfect to catch the price at the very beginning of the swing, but this should not be your main goal. The main thing is to capture the biggest part of that swing.

Swing trading is similar to day trading, but swing trades might be held for several days or even weeks. Moreover, trading setups for successful swing trades appear only a few times a month, but the returns on them are significant.

Now let's find out exactly how to swing trade.

Use Daily Chart

Yes, charts with a low timeframe seem more attractive because the price there is constantly moving. But remember that with swing trading your trades will last more than one day. That is why it is important to look for an entry point on the daily charts.

In this timeframe, it is easier to identify the main trend and set the resistance and support levels. Without this, you won’t be able to find a profitable swing trade.

If you still prefer charts with a lower timeframe, then you can switch to the 4-hour chart as soon as your swing trades on the daily chart start to bring profits.

Determine Key Price Levels

This is probably the most important step in swing trading. You will build your whole trade based on these levels. You’ll need the key price levels:

  • Main trend
  • Support and resistance levels

The type of transaction depends on the direction of the market: you need to buy on an upward trend and sell on a downward trend. Of course, there is also a flat market, when the price moves sideways. Such charts sometimes provide even better swing trades, but it all depends on the level of price fluctuation. You should not risk your funds if the market moves in a narrow range.

Entry on Pin Bars

Remember that with a trading style you have found your strategy as well. Trading on pin bars is just one of the methods you can use in swing trading.

On an uptrend, you need to focus on finding a pin bar at the key support level. When the price starts to grow after this pin bar open a buy trade.

In a downtrend, it’s vice versa. When you see a pin bar key resistance, you should open a sell trade.

Don’t worry if you fail to catch the market right at the moment of the creation of a pin bar. If the price has not gone far from a key price level, you can freely open a trade. Again, the main thing for us is to catch the biggest part of the swing.

When to Exit the Trade?

Since swing trades are usually held for several days, you cannot constantly monitor it. Therefore, it is very important to determine the exit point for your position by setting Take Profit. It’s pretty simple. Use the same key support and resistance levels that you already have on your chart. If you buy on an uptrend, Take Profit should be set around ​​key resistance. If you are selling on a downward trend then exit around key support.

Risk Management

Everyone has own method of setting Stop Loss. Of course, you can use yours, but for trading on pin bars, the perfect place for this level is above or below the tail of the pin bar at the swing point (high or low).

Before you open a trade, assess the risk/profit ratio. When you know roughly your entry point, as well as your Stop Loss and Take Profit levels, you can calculate how many points you might lose or gain.

The optimal ratio is 1:3. For example, if you might lose 50 points on this trade, then the potential profit should be at least 150.

Advantages and Disadvantages of Swing Trading

Each method has its pros and cons. So, without further ado, the benefits of swing trading:

  • There are few suitable swing trades so you can save on commissions and spread
  • You can trade on any type of trend
  • Transactions are fairly safe, as you trade on an already formed price action
  • Long trades provide a lot of free time
  • Positions do not require constant monitoring which reduces stress

Disadvantages of the style:

  • Any risks associated with the transferring of the positions to the next trading day or the next week are also applied in your swing trades
  • You might be charged with swap when transferring to the next trading day

Does Swing Trading Suit You?

You can accept or reject this trading style right away but if you are not sure, then the following information might help you decide:

Swing trading is right for you if:

  1. Are you ready to hold transactions for more than one day
  2. You don’t mind that suitable trading setups might come across only a few times a month
  3. You need a lot of free time and/or you want to combine Forex with another job, study, or family care

You should abandon this style if:

  1. You prefer active trading with a lot of actions
  2. You need to know right away whether the transaction will work out or not
  3. You are not able to hold a trade during a drawdown and will most likely close it before it might give a positive result

Quite a lot of information, right? But no one said that Forex trading would be easy.

Swing trading is suitable for both beginners and experienced traders. I hope that the information in this article will help you to see all the advantages of swing trading and give you the necessary basis for a good start.

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