Finding the right forex strategy is difficult.
Where to start? How do you know when the right person is found?
Given the thousands of trading strategies in the world, it is difficult to determine the answers to these questions.
It only gets worse when you add in countless technical indicators.
But this is not required.
Why not start by identifying the right trading style, such as forex swing trading?
There are far fewer trading styles than there are seemingly countless strategies. While the exact number is debatable, I think there are fewer than ten popular styles out there.
Once you’ve identified a trading style that suits your personality, it’s easy to find a trading strategy that suits that style.
If you’ve identified a swing trade as a candidate, or just want to learn more, this article is for you.
By the time you close the deal, you’ll know exactly what a rotation deal is and if it’s right for you. I will also share a simple 6-step process that will allow you to profit from market volatility in no time.
Read on to learn how to make turnaround deals work for you.
Trading Styles and Strategies
Before proceeding, it is important to understand the difference between style and strategy.
As I mentioned above, trading styles are far less than strategies.
Here are some of the most popular styles:
- Swing trading
- Day trading
- Scalping (usually a subset of day trading)
- Position trading
- High frequency trading
Within each approach, there are hundreds, if not thousands, of strategies. In other words, there are as many different ways to day trade as there are many ways to trade.
It is up to each trader to decide his own style.
For example, a day trader can use the 3 and 8 exponential moving averages combined with the slow stochastics. Another trader of the same style can use a 5 and 10 simple moving average with a relative strength index.
Both are considered day traders, but their strategies are different.
The same goes for swing trading. The sheer number of indicators and methodologies means that no two traders are alike.
This is especially true once human psychology is added as a variable.
To sum up, the trading style defines a broad group of market participants, and the strategy is specific to each trader.
What is Forex Swing Trading?
As the name suggests, swing trading is an attempt to profit from market volatility.
These swings consist of two parts – the body and the swing point.
As traders, it is our job to capture in a timely manner the entries that go into each swing mechanism most of the time .
While grabbing a swing point can be very lucrative, it’s not strictly necessary.
In fact, trying to catch the top and bottom of the swing can result in increased losses. The best way to make these trades is to be patient and wait for a buy or sell signal from price action.
I’ll cover various strategies shortly. For now, just know that swing bodies are the most lucrative part of any market move.
Later in this course, I’ll also show you a way to assess momentum using these swing points.
Day Trading vs Swing Trading
On the other end of the spectrum from swing trading, we have day trading. These two cannot be separated.
As you know by now, the goal of swing trading is to capture the larger moves in the market. Naturally, this requires a retention period of days to weeks.
On the other hand, day trading uses very short holding periods. Sometimes it only takes a few seconds.
There are other ways of trading, but these are the two most popular.
I’ll go over the pros and cons of both, but first let’s look at a simple 6-step trading procedure.
Step 1: Move to the daily schedule
I spend most of my time on the daily chart. They provide more information about price movements and provide more reliable signals.
However, not all daily time frames are created equal.
I use a specific type of chart that uses NY closing prices. Every 24-hour trading session closes at 5 p.m. EST, which is considered an unofficial closing time for the foreign exchange market.
It is possible to use the 4-hour chart for swing trading, but I have found that daily trading works best.
My advice is to start with a daily schedule. Once you make a profit on your daily closing trade, you can switch to the 4-hour clock.
In general, price action signals become more reliable as you move from lower timeframes to higher timeframes.
Step 2: Draw key support and resistance levels
Apart from step 1, this is the most important part of the whole process.
Consider key support and resistance levels as your home’s foundation. Without them, it would be impossible to identify a favorable swing trade.
Before showing you some examples of using swing trading, let’s define two types of levels.
Horizontal Support and Resistance
These are the most basic levels you want on a chart. They provide a good basis for trading volatility in the market and provide some of the best target areas.
If you want to know how to find support and resistance levels, see this article.
Not all technical traders use trendlines. If I’m being honest, I don’t know why anyone would ignore them, especially swing traders.
Not only do they give you a way to identify trending entries , but they can also be used to spot them before a reversal occurs. Be sure to read the course I wrote on trend strength (see link above). It will explain everything you need to know to use trend lines in this way.
Step 3: Assess Momentum
At this point, you should be on the daily timeframe with all relevant support and resistance areas marked.
Remember how I mentioned earlier in the article how to use swing points to assess momentum?
Well, this is where those swinging highs and lows come in handy.
There are three types of market momentum or lack of momentum.
- Uptrend: higher highs and higher lows
- Downtrend: Lower Highs and Lower Lows
- Range: Lateral movement
A market in an uptrend is carving higher highs and higher lows.
Notice how each swing point is higher than the previous one. You want to be a buyer during this bullish momentum.
On the other end of the spectrum, we have a downward trend. In this case, the market is carving lower highs and lower lows.
You want to be a seller here.
Next, we will cover various price action signals.
Last but not least is a ranging market. As the name suggests, this happens when the market moves sideways within a certain range.
Although the chart above has no bullish or bearish momentum, it can still generate profitable swing trades.
In fact, ranges like the ones above can often yield some of the best deals . This is mainly due to the support and resistance levels standing out from the surrounding price action.
Just look at the two pin bars in the table below.
Step 4: Watch for price action signals
Let’s review the position at this point.
Steps 1 and 2 show you how to use the daily time frame to identify key support and resistance levels.
Then, in step 3, you learned to assess the momentum of the market. This can tell you whether the market is in an uptrend, downtrend, or range-bound.
If the market is in an uptrend, you want to start looking for buy signals at key support.
Two of my favorite candlestick patterns are the pin and the swallowing stick. You can learn more about these two signals in this article.
This is a good example of a bullish bar at key support during an uptrend.
The goal is to use this pin bar signal to buy the market. By doing this, we can profit from the market swinging up and continuing the current rally.
On the other hand, if the market is in a downtrend, you want to watch for sell signals from resistance.
Again, we use a pin-like signal to identify swing highs, also known as swing points.
You probably didn’t grab the whole swing, that’s okay. The idea is to grab as much of it as possible, but waiting for confirmation of price action is crucial.
When looking for settings, be sure to scan the diagram. Don’t make mistakes with search settings.
The two moves sound similar, but they are far from each other.
Scan setup is more of a qualitative process. In other words, you’re scanning for optimal settings, and if you can’t find anything, that’s ok.
Most traders feel that they need to find a setting every time they sit in front of their computer. This is called search settings.
So remember to scan for swing trade opportunities; never look for them.
Step 5: Determine Exit Points
There are two rules for identifying exit points.
The first rule is to define profit targets and stop loss levels . Many traders make the mistake of just identifying the target and forgetting their stop loss.
Don’t make that mistake. In order to calculate the risk as described in the next step, you must define the stop loss level.
The second rule is to identify these two levels before risking capital. This is your only completely neutral bias.
Once you have money at risk, that neutral stance goes away. Then it becomes too easy to set exit points at levels that are favorable to your trade, rather than basing them on what the market is telling you.
So, what is the best way to determine the exit point?
Simple. Just use the support and resistance levels identified in step 2.
Remember the bullish bar for GBPUSD? (If you need a refresher, see Step 4.)
This is an easy way to determine your profit goals.
In this case, GBP/USD rallied past our target and that’s okay.
Remember, the goal is to catch the majority. We don’t need to go all out to make money.
We can do the same thing using the AUDNZD bearish pin bar from step 4.
Remember, those horizontal areas and trend lines are your base.
Once they’re on your chart, use them to your advantage. This involves monitoring entries as well as determining exit points.
Step 6: Calculate and manage risk
Once you’ve identified the exit point for your trade, it’s time to do some risk management.
Before discussing how to determine stop loss levels and profit targets, I would like to share two important concepts.
The first is the R multiple. This is a method of calculating risk using a single number.
For example, setting a 100 pip stop loss and a 300 pip target would be a 3R.
Likewise, if your risk is $100 and your gain is $500, the risk reward ratio is 5R.
The second concept I want to discuss is asymmetry.
A favorable risk-reward ratio is one where the reward is at least twice the potential loss. Written as a multiple of R, equal to 2R or greater.
The first thing you need to do when calculating the risk of any trade is to determine where you should place your stop loss.
For needle bars, the best position is above or below the tail.
The same goes for a bullish or bearish engulfing pattern. The stop loss is about 10 to 20 pips above or below the trading candlestick, which is a good place to start.
Now that you’ve identified your stop loss, it’s time to determine your profit target.
This is where these key levels come into play again. Remember, when trading swings, the goal is to capture the swings between support and resistance levels.
So, if the market is trending higher and forming a bullish bar at support, ask yourself the following questions.
Where is the next key resistance level?
The answer will not only tell you where to put your goals, but will also determine whether a favorable risk-reward ratio is possible.
If so, you may have a valid buying opportunity right in front of you.
If not, you may want to stay on the sidelines.
Is Swing Trading Right for You?
There is no right or wrong answer here. After more than a decade of trading, I have found that swing trading is the most profitable.
Remember, I’ve tried almost every trading style and strategy under the sun. Before 2010, I tried everything from one-minute scalping strategies to Monday’s gap trading.
However, just because Forex trading worked for me means it won’t work for you.
Finding a lucrative style has a lot to do with your personality and preferences, which is probably more than you probably know. In fact, if the style you choose doesn’t fit your personality, you’re bound to struggle.
The following points will help you decide if swing trading is right for you.
You might want to become a Forex swing trader if:
– You don’t mind holding the trade for a few days
Most Forex swing trades last anywhere from a few days to a few weeks. This means holding positions overnight and sometimes on weekends.
Of course, there are several ways to manage risk with a longer holding period. One way is to simply close out your position before the weekend if you know there is a chance of volatility, such as a government election.
– You want more freedom on your own time.
Forex trading allowed me to start daily price action in 2014. I wouldn’t have time to maintain the site without using this transaction method.
On average, I don’t look at the charts for more than 30 or 40 minutes a day. Spending more time than that is unnecessary and puts me at risk of over-trading.
– You don’t mind making fewer trades, but more per trade,
as swing trading Forex works best on higher timeframes with limited opportunities. You only get five to ten settings per month.
However, each trader’s gains are likely to be much greater than the gains of day traders.
For example, my minimum risk-reward ratio is 3R. This means I earn 3% profit for every 1% of my account balance at risk.
– You are looking for a slower paced way of trading
In forex trading, being slow is not a bad thing. In fact, a slower tempo style, like swing trading, gives you more time to make decisions, which reduces stress and anxiety.
So, if you’re looking for an easier way to trade the markets, swing trading might be the answer.
– You have a full-time job or school,
I don’t always trade at home. Being able to trade Forex on my work schedule is a huge plus.
It’s impossible if I need to sit in front of the chart all day and watch every tick. This is the freedom that swing trading can provide.
You may not want to be a Forex swing trader if:
– You are looking for an action-packed way of trading
Swing trading is not fast or full of action. This is one way slower-paced, well-trained traders win.
I would say that if your holding period is more than a few days and your trades are not boring, you are doing it wrong.
– You don’t mind making a small amount of money on each position
As a swing trader, the average profit on successful trades can be 2% or more.
On the other hand, most day traders make much less per profitable trade. They make up for the volume, but the payoff per execution is relatively small.
– You can’t stand the idea of holding positions overnight.
Most swings last anywhere from a few days to a few weeks. Therefore, swing traders will find that holding positions overnight is a common situation.
If you can’t sleep knowing you have venture capital or unrealized equity gains, then swing trading may not be for you.
– You need to know immediately if I am right or wrong,
I have been in multiple positions for over a month. Some have even been around for two or three months, especially when I trade reversals on a weekly time frame.
Such long-term deals require patience. It may take days, weeks or even months for you to know if your analysis is correct.
Having said that, trailing the stop to lock in some profits does relieve most of the pressure.
– You feel anxious when the trade goes against you.
In most cases, the market doesn’t immediately take off in the direction you expect. Drawdowns are something all traders have to deal with, no matter how close they are to the market.
However, pullback trades can last longer for pullback traders. This does not mean that you will lose more money, but the position may remain negative for longer compared to day trading.
Forex swing trading is one of the most popular ways to trade around, and for good reason.
It allows for a less stressful trading environment while still generating incredible returns. Also great if you have a temporary job or go to school.
The level of accuracy is perhaps the most important factor. If you can’t rely on the support and resistance levels on the chart, then you won’t be able to trade with confidence.
In my experience, the daily time frame provides the best signal. Just make sure to use the NY closing price chart, each session ends at 5pm EST. Please confirm with your broker.
The best way to eliminate trading sentiment and ensure a rational approach to the market is to identify exit points ahead of time. If you wait until there are vacancies, it’s too late.
First, be patient. Remember, just one good swing trade per month can pay off handsomely.