Normally the Forex market is structured to move in waves, after a series of buying comes a selling and vice versa. However no one knows the degree of the upward and the downward movement the market will produce at any turning point, this is most times determined by the market sentiments. Generally what we mean by the term ‘swing’ in Forex trading is basically referred to as trading turning points, some folks call it pivots. Always have it in mind that the market can never keep buying or selling for eternity. There will always come a point in time when a particular direction or trend will get exhausted and need some rest.
This resting or exhaustion period of a current trend is the point in time we experience a retracement and if the retracement happens to be sustained over a long period of time, it eventually becomes a reversal of the current trend. Believe me there’s nothing as beautiful as pin-pointing turning points in the Forex markets as it provides great risk to reward trades. The Forex market is custom made for swing trading. Swing trading is my favorite and most effective method of Forex trading. Swing trading has all the advantageous of both day trading and trend trading without the inherent flaws of both methods.
Day trading is a great risk management tool, as you never hold a position over night, this mode of trading has no business with swaps; however, this fact also severely limits your profits. Trend trading allows you to capture long term moves, but often suffers severe draw-downs during retracements while you wait for the anticipated trend to continue. Swing trading is the perfect compromise between the two trading methods. Its goal is to locate short term trends, ride them without regard to time-frame, and quickly exit when the move ends. The 24-hour nature of the Forex market makes it a perfect match for swing trading.
If you look at any Forex chart, you will see trends but these trends, will have reactions to the upside and downside where prices are pushed too far up or down, away from the average price, but prices will always return to more realistic levels and sometimes back to the original level the trend ignited. The aim of the swing trader is – to sell into overbought levels and buy into oversold levels and liquidate the trade, when prices have returned to fair value.
Swing trading the Forex market can also be referred to buying when the market forms swing lows and selling when the market makes swing highs. However this might not be as easy as it sounds but with constant practice, it will become easier and it will be easy to filter out fake signals. Even at that we will always experience loss trades in the Forex market no matter the strategy we make use of in trading. But if we can implore a reliable risk to reward trading system, we will be able to survive the bad times and still end up in profit at month ends.
The tools I use for swing trading are 60-minute candlestick charts where i focus on the price action after each candle closes. I keep the charts relatively clean of indicators except for my customized Fibonacci retracement and SSRC. One can swing trade technically, fundamentally or use a combination of both. This article will explain and give an example of each of the 3 swing trading methods. Let’s start out with Technical:
Technical Swing Trading Method — This is perhaps the most well known method to today’s Forex swing trader. All the major retail dealers have extensive education on Technical Analysis and often offer a nice suite of T.A tools. I like to wait for the market to trend extensively (150 pips and above) towards one particular direction. Then i wait for Fibonacci retracement customized indicator to signal a red color or buy color on the close of the current candle stick. Red color on candlestick signals sell and green color on candlestick signals buy. However this is just a yellow traffic light, it means get ready. For green traffic light to get into the trade direction, i wait for SSRC to get to +0.75 reading to give me a buy signal confirmation and -0.75 reading for a sell signal confirmation. This is a typical example of a recent swing from the GBP/USD chart.
Fundamental Swing Trading Method— The Forex market is driven by fundamentals such as economic announcements/number releases such as central bank interest rates and meetings, quantitative intervention, employment statistics, gross domestic product, retail sales, inflation report data’s and a host of other events. This fundamental activities are what causes demand and supply in the market not technical indicators. Technical Indicators are majorly built to pin-point accurate entries and exits from my own perspective of trading. However most traders don’t really care about news releases as regards to Forex trading, as there has always been a constant battle between technicians and fundamentalists.
Its even easier for me to swing trade fundamentally than technically because i do not need to monitor the market every now and then for swing entries. Forex news swing trading is easier to track due to the fact that there is availability of news calendar to monitor the market to know when and which news is coming up for each currency every day of the week. I usually use the forexfactory calendar to map out my plans for the week. I select trade directions 30-minutes to the news release by checking out where the recent swing was made and i place the direction hoping the news release will spike towards the anticipated direction. This method provides me a reasonable risk to reward ratio.
There are also a combination of fundamental and technical tactics that are highly effective in the Forex market. I will touch upon them in future articles. I hope you find this brief article described how to swing trade the forex market as an effective method of Forex trading and provided examples of a technical and fundamental swing trading method.