Within the foreign exchange market there are two types of traders, the fundamental analysis traders and the technical analysis traders. Swing trading is defined as a type of fundamental trading strategy whereby a trading position is held for over a day. This strategy requires a long-term position as fundamental traders trade using forex news thus need days to allow for changes in the market to impact the movement of the position. Yet, while it seems rather basic in the short description, swing trading can be rather complex as it borders on day and trend trading.
The right conditions
A forex market can be divided into two distinct conditions, ranging and trending. One needs to identify whether the market is a ranging market or a trending market as the movements will affect the trading strategy used. Day trading is most recommended for the trending markets as larger market movements allow a day trader more profits. However, the longer term traders would do better in a ranging market as they require a slow building of profits.
The swing trading strategy has been seen to be most effective when used in a ranging market. This is due to all trades lasting longer than one day. In a trending market a long-term trade would more than likely incur a loss as the trending condition is more suited to short-term trades. The indicators used by a swing trader will generally trigger during range market movements which are approximately 80% of forex trading hours.
Swing trading tools to consider
In order to be an effective trader you will require particular tools to identify the most appropriate trading times for your strategy. Swing traders use both fundamental and technical analysis in order to find these indicators. Fundamental analysis assists swing traders in identifying when a swing is approaching based on forex news.
The technical analysis provides indicators using analysis of different types of forex charts. This helps the trader map out the ideal entry and exit points of a trade. Various technical analysis methods utilised include moving averages and Bollinger Bands. Swing traders may also utilise the MACD chart to identify particular waves within the forex market.
Suitable currencies for forex swing traders
In order to be a successful trader you must take time to consider which currency pairings you will choose to trade. New traders often neglect to examine the consequences of the chosen currencies, but the match of pairing and strategy are essential for profitable trades. This is due to certain currencies working more effectively with short-term trading strategies and other currencies working more effectively with long-term trading styles.
Evidence has indicated that the most successful pairings for swing traders are the currencies with high volatility. This means that when the market is very active this currency pairing will swing between set highs and lows. Swing traders should close their trade positions when they view the pairing swing in the opposite direction.
Reaping the rewards
Swing traders operate in the channels developed during technical analysis and many of these traders take their profits when a trend is near the upper or lower lines. However, there are many swing traders who choose a vague point for their exit instead of that from technical analysis. These traders will often present with strong stop losses as a protective measure should they wait too long to extract the profit.