What is swing trading?
In a typical forex market there are several types of traders in action:
- The scalpers tend to sell quickly, mostly in a few minutes, and try to scrape off what little profit comes their way.
- The day traders tend to buy a certain currency and stick with it for a few minutes or a few hours before selling it. They never hold a position into the next day.
- Swing traders mostly buy a currency and then hold it for a few days to a few weeks and capitalize on market swings in these periods.
- Holders have an affinity for the long term gains. They buy a currency in anticipation of long term market changes they can win on.
As seen above, swing trading is somewhat of an intermediate trading technique. In trading terminology, this means that the trader is comfortable with keeping their positions open for extended periods of time and are not looking for easy profits that one can attain by going after every high and every low.
Swing trading vs. day trading
These are the two most common type of trading techniques employed by new-comers in the Forex trading arena. Here is a comparison between them.
- Day traders basically don’t want to risk their money by keeping their position overnight because they cannot handle the stress of having things happening while they sleep. There are several reasons for it; either they have not mastered trade psychology yet and are driven by greed or are investing money that they shouldn’t be investing thus making them wary of losses. Swing traders, on the other hand, are comfortable with keeping the currency with them for longer periods of time because they are not hindered by rapid trends.
- Day trading can be excruciating because one cannot afford to miss a fleeting trend. Often day traders cannot even go for a bathroom break because they are glued to the screens of their monitors. Such stress is counterproductive and day trading slowly tends to take over your life as you cut many activities from your daily schedule to make room for your trading sessions. In short, day trading acts as a full-time job. Conversely, you are afforded a more leisurely pace by swing trading and thus have the flexibility of doing it part-time.
- Because of the rapid nature of day trading, day traders aim to capitalize on highs in the by-the-minute charts and thus can see daily profits from 0.5% to a few percentage points. Most of the day trading occurs during the morning hours when the stocks are reacting to recent news events. Swing trading, in contrast, has a much larger trading window so traders can turn in profits in excess of 20% because they tend to have a profit target in mind.
- As can be deduced, day trading involves multiple trades per day from 3-5 to all the way to 100. Such amount of trading is bound to take a toll on you while also paving way for losses. Swing traders, on the other hand, tend to make trades between 4 days to as long as 3-4 weeks because they are hunting for a swing that would justify their investment.
- Day trading is inherently riskier because despite having a lot of control over your trading session, you can go above and beyond your financial constraints and invest more than you would want to. This is where swing trading wins. It allows you to master the art of making decisions pragmatically.
- The instant gratification that comes from day trading is a feeling that gets most traders addicted. Despite maybe earning only a few pennies per trade, it is the natural high of accomplishment for day traders. They go after it. Swing traders, in dissimilarity, are patient individuals who go after the long haul.
How to swing trade?
Unlike popular belief there is no hard-and-fast rule regarding a currency that is suitable for swing trading. As long as a currency has high volatility, good liquidity and tight pip spreads, you can swing trade it.
To capitalize on swing trading, you have to employ indicators that can help you predict trends on a Forex graph. There are countless such indicators in popular use. We will go over a few important ones briefly. For further, in-depth reading you can go over their respective articles as well.
- Bollinger Bands are used to predict volatility. Look for areas where the bands squeeze together to have an idea of a volatile period ahead. Normally when the upper band is breached by the Forex curve, it signals an upward trend and vice versa.
- RSI plots are used to determine reversals or breaks in the current price trends with respect to historical and momentum-based data. The main way an RSI plot determines entry or exit points is through the use of failure swings.
- A Stochastic Oscillator employs standalone graphs to predict oversold and overbought trends. Normally, when the %D graph crosses the 80 mark, the currency is deemed as overbought and thus signals the traders to sell it. Similarly when the %D graph cuts across the 20 value, the currency in question is said to be oversold and thus signals a period of prospective buying.
- Moving Averages which can be either simple or exponential, rely on crossovers to ascertain trends in a Forex graph. When a moving average line is cut in the downwards direction by the Forex curve then there is a potential down trend around the corner and vice versa.
In the end, the type of trading you employ is entirely up to your trading psyche as well as your financial conditions. Whichever type of trader you become, you are bound to enjoy the thrill one gets while watching that Forex graph gyrate across its fickle route.