Table of Contents
Summary:
Swing trading in forex involves holding positions for days or weeks to capitalize on short to medium-term market swings. It balances between day trading and long-term investing, requiring less constant monitoring.
Main Points:
- Definition: Swing trading is time-based, with trades held for days or weeks.
- Comparison: It contrasts with day trading (single-day trades) and position trading (months/years).
- Advantages: Potential for profit, less frequent monitoring, lower stress.
- Drawbacks: Higher risk due to market gaps, patience needed, possible missed opportunities.
- Forex Swing Trading: Combines technical and fundamental analysis, with indicators like moving averages and RSI.
There are many ways to trade assets, including foreign exchange (forex) currency pairs.
Today, we’ll look at one type of time-based trading called swing trading. More specifically, we’ll look at swing trading as it applies to forex.
Before we start looking at those specifics, it helps to understand the basic idea of swing trading in general. Here’s what you need to start learning about swing trading.
What is Swing Trading? How is it Different from Other Types of Trading?
Swing trading in general refers to a time-based approach to trading. In swing trading, traders open and close positions (i.e. they make trades) across days, weeks, or sometimes months. Investopedia points out swing traders look for opportunities to find positive returns in the short or medium term.
An easy way to understand swing trading is to compare it to day trading. In day trading, traders open and close positions within a single day.
Swing traders hold their assets for longer periods of time than day traders. However, it’s a significantly longer period than what’s common in day trading.
For the sake of being complete, position trading and trend trading are the longest-term trading strategies. In these approaches, traders often hold onto their positions for days or weeks.
Position and trend trading are more similar to investing in their time frames. However, the goal in investing is generally to buy and hold assets that perform well in the very long term (generally weeks and sometimes years).
Position and trend trading are more short-term strategies than investing. The goal in these types of trading is finding opportunities that provide higher returns in less time as compared to investing.
The forex market is especially volatile, and holding assets for many months or years is very rare. There are forex position and trend traders who will hold forex pairs across weeks, however.
So, we can see that swing trading falls in the middle of these three major categories. This is true for swing trading forex as well as many other types of assets.
Charles Schwab points out that many small changes happen in larger, long-term market trends and cycles. These changes are commonly called swings. That’s how swing trading got its name.
Why do Traders Choose Swing Trading?
Swing trading is often attractive to traders who can’t constantly monitor the markets they trade in, whether it’s the forex market or another one. Day trading requires frequent market check-ins and analysis, with trades opened and closed on the same day.
When other factors get in the way (work, family commitments, and many others), day trading may not be possible. However, many traders can find the time to check in once or a few times a day to follow market developments and adjust their strategies.
That’s the level of attention needed for swing trading. In turn, that makes swing trading a popular choice for traders who can’t constantly follow the market and conduct analysis, as well as those who prefer to follow somewhat longer-term trends as they seek positive returns.
Looking at Swing Trading in Forex
The basic idea of swing trading applies to most markets and traders. If a trader normally opens and closes positions across a period of days and weeks, it’s fair to call them a swing trader. That’s true for forex swing trading, stock swing trading, and many other examples.
Here’s some more context about swing trading for forex specifically. Forex swing trading involves both technical and fundamental analysis.
As a reminder, fundamental analysis in forex involves tracking events like news and political happenings that can affect the price of a currency. Technical analysis involves the review and analysis of past price movements to predict future changes.
Because swing trading is a relatively short-term activity, technical analysis is very important for forex swing trading strategies. Charting recent price movements can reveal trends that lead to positive returns.
The best forex indicators for swing trading include moving averages for initially finding trends. The relative strength index is a popular indicator for charting the momentum of a trend.
However, fundamental analysis can play a key role in helping traders find specific opportunities on which to act. News about a country’s economy or political situation can impact a currency’s price, providing key forex swing trading signals. Finding the short-term swings in those larger trends is a crucial part of swing trading.
Forex Swing Trading Pros and Cons
Forex swing trading is attractive to a wide range of traders. As with any type of trading, it has pros and cons. We’ve shared these positives and drawbacks before on our blog. Here’s a reminder.
Forex Swing Trading Advantages
- The longer-term swing trading can lead to more potential for profit.
- Swing traders only need to review their trades on a daily basis, not constantly.
- Swing trading can be less stressful. There can be a lower chance of missing out on an opportunity as compared to day trading, due to the longer time frame.
Forex Swing Trading Drawbacks
- Exposure to risk can rise because of market gaps and unexpected events and news.
- Swing traders need to be more patient than day traders.
- It’s still possible to miss out on opportunities in swing trading.
- Interest rates on held currency pairs, known as the swap, can eat into positive returns.
Forex Swing Trading Final Thoughts
Swing trading can be easier to manage than day trading, at least for traders who have other commitments and responsibilities. Swing traders don’t simply make a trade and sit on it, but they don’t have to constantly review forex market activity.
Many strategies and indicators used in day trading also apply to swing trading. If you want to start trading currency pairs on the forex market, swing trading can be a good way to learn more about trading without needing as much of a time commitment as day trading.
Explore the Stellar Challenge at FundedNext, one of the most trader-friendly challenges in the industry. Create an account and sign up today!
