Swing Trading Practices in the Forex Market

Swing Trading Practices in the Forex Market

 A common description of swing trading is that it is an approach that rests somewhere between day trading and trend trading, as a day trader will hold a currency for a few minutes or hours – but almost never more than a full trading day.  At the same time, a trend trader might choose to analyze much longer term trends and can hold positions from a few days to multiple months or years.  Swing trading rests somewhere in the middle of these two approaches.

Differences in Swing Trading vs. Breakouts and Trends         

But swing trading differs from trend following in some critically important ways, and the two trading styles should not be confused with one another.  “In essence, swing traders look to step in once a trend has ended,” said Haris Constantinou, currency analyst at TeleTrade, “and then buy or sell into a reversal.”  There are also some differences with breakout trading that should be visible to more experienced traders.  Namely, swing trading allows traders to “buy low and sell high.”  This is very different from breakout strategies that require traders to buy high and sell low (only after major breaks of support or resistance have occurred).  When a trend is reaching completion, there tends to be additional volatility that enters into the market as a new trend tries to asset itself.  Swing traders will look to capitalize on this volatility, as prices make small reversals within a larger trend.

In a typical trending move, we can see higher highs and lows (for an uptrend) or lower highs and lower lows (for a downtrend)..  But within these larger trends, we can see often many different corrections and retracements that allow traders to enter into the trend at a later time (after that trend has started, and begun to show small reversals).  These smaller “swings” present some excellent opportunities for establishing new positions.  But what, specifically,are we looking for when we are entering into swing positions within a longer term trend?

Common Requirements for Turning Points

Once the longer term trend has been established, we will wait for retracements downward so that we can get back into the trend at a cheaper price.  Once these retracements are seen, we will need to find evidence that prices are beginning to turn, or “swing” back into the direction of the overall trend.  Some examples of these signals can be seen in candlestick patterns (such as a morning star or a bullish engulfing candle in the case of an uptrend) or in stalling price activity that comes near a significant Fibonacci level (such as a 38.2 or 61.8 retracement). In these areas we can expect prices to stall and fall back into the direction of the larger trend.  During these “swings” back, we can look to enter into new positions in the currency.