Forex Swing Trading

Forex swing trading is a trading style that’s popular and profitable in Fx markets. Other names for a similar style are Position Trading, and Fundamental Trading.

But what is it exactly?

What’s Forex Swing Trading?

First, we need to know what swing means.

We are referring to swing highs and swing lows.

We spoke of swing lows and swing highs in our Fibonacci retracement page, but a short reminder won’t hurt you right?

Essentially, market price moves up and down given enough time.

What this means is you get something similar to a musical page.

See the notes going up and down?

A swing low is simply the lowest point in a period, while the swing high is the highest point in a period.

With candlesticks, you can identify them by checking for those candles which are lower than those around it (on both sides).

And for the swing high, you find the candle which is higher than those around it (on both sides).

Ok, but why is this important?

When you find these swing points, it becomes easier to use technical analysis tools such as Fibonacci retracement or pivot points, as well as support and resistance zones to take into consideration before entering the trade.

These swing points mark where price is likely to bounce from (up and down, and so on, like with a musical page).

Wait, but you said forex swing trading could also be called fundamental trading, why are we talking about technical analysis?

Before we even start checking for swing lows and swing highs, we must know which currency pair we’re going to trade, right?

We must also know which direction the pair is most likely going to follow, no?

As in, are we going long or short this pair?

That’s a question which can only be answered with fundamental analysis.

But once we’ve done that homework, and decided it could be a worthwhile trade, then we must check the technical to see if the trade is really a high probability one, or if it could be deterred somewhat by many technical zones.

Wait! Tell me more.

Forex Swing Trade Process

You asked for it, and here it is.

First, you need to determine if the big-picture fundamentals are favoring your trade.

Second, you need to go for a moment in which sentiment for the two currencies is in your favor.

You have to pick a moment when sentiment is strong and unlikely to change quickly.

Third, once you have steps 1 and 2 done, you should have a pair and a direction.

It is now time to apply some technical analysis in order to determine a good entry point, as well as adequate stop loss, and take profit targets.

Follow this process to riches.

Hold on!

We still haven’t decided to enter the trade.

It’s possible your technical analysis says your risk reward is bad.

If so, you need to determine how confident you are on the fundamental forces driving price for the next few days.

You may choose to drop the trade, or go forward with it.

What do I mean by sucky risk/reward?

There are several ways to do it, but a general way to determine this had to do with strong support and resistance zones.

If you plan to go long EUR/USD for example, and price is currently 40 pips away from a strong resistance zone, while the next support zone is 100 pips away, then you know you have little technical protection if you enter now.

Thus, if price goes against you, you’re much more likely to lose 100 pips swiftly.

But if price goes your way, then there’s still a good chance price won’t be able to pass the resistance zone, and you will make only 40 pips.

Bad risk/reward, get it?

No risk, no reward!

Of course, this doesn’t necessarily hold, since the fundamental forces may be strong enough to blast through that resistance zone and make you some crazy pips!

What I’m trying to say is there are opportunities (like the one just described), and then there are semi-perfect opportunities where you have both the fundamentals AND technical (risk/reward + good entry level).

Obviously, the second type of opportunity will be less frequent, but it happens a lot, so stay alert.

Ok, so we have a semi-perfect opportunity (semi, because nothing can be 100% perfect, but it can get darn close), and we enter the trade, what then?

You need to manage the trade.

Managing a Forex Swing Trade

What many experts do is simply adjust their stop loss orders to reduce risk in the trade.

Since a forex swing trade takes a few days to play out (and shit can happen in the meantime), most traders place a wide stop order to avoid being stopped out in a short-term move (say 100 pips).

But once price has moved in their favor, and profits are on the table, many pros adjust their stop loss up (if in a long trade), or down (if shorting).

In essence, they take risk out of the position, by reducing the amount of pips they’re willing to lose.

Time to manage Da’ Trade

Eventually, if price moves enough, you can lock-in some profits by moving the stop loss order pass break even (point where you entered the trade).

However, some people aggressively move their stop loss, and are eventually stopped out, because they didn’t allow enough room for price to “breathe”.

So, if price moves 50 pips in your favor, don’t take a 100 pip stop loss to break even, that’s just too aggressive.

Closing Act

Remember I didn’t go through how to determine your stop loss and take profit targets, that will depend more on your system and style.

However, a good rule of thumb is to take a confluence of technical levels into account.

In other words, combine support/resistance with Fibonacci levels/Pivot points, and also psychological levels ending in 0 (such as 1.1700 as opposed to 1.1687).

Why? Because a bigger number of traders will pay attention to those levels, which will make it more likely for you to be successful.

For example, if you’re going long, you should place your take profit slightly before a strong resistance zone (since price will bounce downwards).

And you should place your stop loss below a strong support level (price is likely to bounce upwards, thus, giving you a “shield” of sorts).

This shielding principle also holds for adjusting your stop loss order. Keep it protected by staying on the right side of a support/resistance zone for your pair.

If you follow those general guidelines, you might make some money forex swing trading.

Good luck,

Emil Christopher,

The Forex Economist

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