There are many different styles of traders in the Forex market. From day trading to long-term trading, the styles and approaches vary greatly among the large number of traders in the Forex market.

Swing trading (or momentum trading) is a trading style in which the trader holds open positions for a few hours up to a few days. This is very different from day traders who rarely hold an open position for more than a day. It is also different from long-term traders who can hold open positions for months. Swing trading is a considered a medium-term trading style. As with any trading style, swing trading requires discipline and clearly defined goals.

Swing traders look for trends in currency price movement. Price direction is very important for swing traders. They hope to get in at the start of a trend or join a trend in progress in order to profit from significant price movements of currencies. However, recognizing that trends don’t last indefinitely, the swing trader will have clearly defined parameters for entering and exiting a trade.

Swing traders possess many of the same skills that day traders exhibit. However, they also have a broader perspective on the market. They perform extensive research and analysis, and are patient and disciplined to work within the parameters of their trading system. Forecasting is their strongest tool as they are seeking profits from the direction that a currency pair moves. They often have nail-biting sessions in which trades appear to be moving against them, then reverse and take them into profitability. Swing traders look for larger profits than day traders; they seek a minimum of 50 to 100 pips on each trade. However, they will take smaller profits if they accumulate quickly. If their trade enters their “loss zone,” swing traders will exit the trade without hesitation.


Five Guidelines for Swing Trading

Get the big picture.

Swing traders must know how the market is acting and reacting. Using fundamental analysis and technical tools and indicators can help the swing trader to forecast more accurately the direction of a currency pair. However, the fundamental data will provide the most accurate information on the demand for a particular currency, which will show the direction in which it is likely to move.

Use technical analysis.

A trading opportunity is often spotted using charts, trend lines, and support and resistance levels. Entry and exit points are more easily determined when using technical indicators that can show everything from resistance and support levels to whether a currency is overbought or oversold. Fundamentals that provide the big picture will not give the trader the entry and exit points for a trade. Using technical analysis is critical so that the trader can determine whether a trade is ripe for entry and when to take the maximum profit.

Know trading events and data.

Certain economic events and data can make the currencies trend in a certain direction. Central bank announcements, certain economic reports, and other market-moving news items can lead to short-term trends lasting anywhere from an hour to several days. Swing traders need to be aware of these events so they can take the maximum profit from the currency price movement.

Know the risk-reward ratio.

Like day traders, swing traders must know the risk-reward ratio on every trade. Since more time is usually spent on research and analysis in swing trading, the opportunity to perform this quick analysis will arise and should be taken. Since swing traders will hold an open position for a few hours to a few days, their exposure is greater than day traders. Greater exposure (or risk) means that the potential reward should also be greater. A good risk-reward ratio for swing trading is 3:1 or 4:1. A swing trader should never enter a trade when the risk-reward ratio is 2:1 or 1:1.

Trade currency pairs that are showing a strong trend.

A currency pair can either move in a trend or within a range. Swing traders need currencies to move in a particular direction. In other words, the currency must be showing a strong and reliable trend. The best way to determine whether a currency pair is trending is through the use of charts. Visual tools can clearly show if a currency is experiencing a trend.

Many swing traders also use trend lines to delineate the trending pattern of a currency. The best way to determine the strength of a trend is through the Average Directional Index (or ADX) number. When the ADX number is high, trend is strong. When the number is low, the trend is weak or nonexistent. Ideally, swing traders are looking for currency pairs with an ADX number of 30 or more.


Is Swing Trading the way to go for you?

Does this disciplined, patient, and research-oriented trading style appeal to you? Most retail traders in the Forex market are swing traders to various degrees. It is a slower pace than day trading, but is more research-intensive. Also, a swing trader must forecast with reasonable accuracy the future direction of a currency. Or he must find a reliable trend to join and profit from.

If swing trading sounds like it is consistent with your time, money, and personal commitments, it can be a great way to enter the Forex market.