How to use swing trading strategies in forex

Foreword and disclaimer

How to use swing trading strategies in forex gives an in-depth overview of what swing trading strategies are and how you can implement this approach to trading. This article gives a detailed overview on what swing trading is all about and what it is not.

There are no trading strategies outlined. However, this makes for essential reading if you are interested in using swing trading strategies. This guide lays the groundwork, so you clearly understand the various concepts in swing trading that you need to pay attention to.

By following this guide on how to use swing trading strategies, you will be able to plan your path into swing trading. The article is geared towards traders who are already familiar with the concepts of technical and fundamental analysis. The article also assumes that the reader has some familiarity with trading and the trading concepts.

By the end of this article, you should be able to have a good understanding of the various swing trading concepts. It will then open the way for you to start exploring swing trading and keep you on the right path. As with everything, remember that trading or speculating in the financial markets is risky. There are no guarantees and trading can incur losses which can exceed your trading capital. Therefore, this is not suited if your risk tolerance is very low.

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Swing trading strategies - Introduction

How to use swing trading strategies in forex gives you an overview on how you can develop this short to medium term trading strategy in the forex markets.

In this article, we will discuss the main aspects of swing trading and how you can design and build your own swing trading strategies. We will then move into the various aspects that you need to bear in mind.

But before we go any further, it is essential that the reader understand that there are no get rich quick schemes. Swing trading can be lucrative but requires a lot of dedication and practice. If you expect to see your capital increase dramatically by using swing trading, then you are mistaken.

One of the common misconceptions of swing trading is that traders believe that this is the "Holy Grail" of trading.

The article, how to use swing trading strategies in forex merely guides you through the process. Before you read this article, it is assumed that you have some knowledge about the financial markets. This swing trading strategy article is a bit advanced.

Therefore, if you are reading this article, then we assume that you have some knowledge about trading strategies.

Ideally, you have been a day trader and have been trading for a while. It does not matter whether you are trading forex or futures or any other markets for that matter.

Swing trading is merely a concept that can be adapted to any market of your choice. Having said that, remember that swing trading can incur some extra costs depending on the type of market you are trading.

For example, if you are trading futures, then it is essential to check with your futures broker as the overnight trading can require additional margin requirement rules.

What is a swing trading strategy?

Before we go on to answer this question, let's explain what swing trading is. Swing trading is an approach to trading the markets.

In this approach, you typically hold your trades for extended periods of time. This also means that you will hold your positions overnight. The eventual goal of swing trading is to capture the medium to short term trends in the market.

From the above explanation, you can put swing trading as somewhere between short term day trading and long-term investing. Swing trading is a mix of both, because you are speculating and at the same time investing (but over a shorter period of time).

There are some inherent risks associated with swing trading as you can see. Therefore, day traders need to retune themselves. Swing trading requires you to focus on a lot of factors.

This is contrary to day trading where traders can actively manage their positions and thus reduce a bit of risk.

To be successful with swing trading, you need to have a lot of patience and also trade objectively. The forex markets, which have a higher volatility, can often put these traits to the test. Therefore, having a sound swing trading strategy is essential.

You also need to have a good understanding of the fundamentals if you want to swing trade successfully. Besides the mental capabilities, swing trading requires you to focus on other typically ignored factors such as position management or risk management.

Having a sound knowledge of the technical indicators, which forms the core of your swing trading strategy is also essential.

Now that we have a basic understanding of what is a swing trading strategy, in the next section, we will explore the various things that you need to bear in mind.

Factors that influence the success of your swing trading strategy

There are many factors that can influence the success of your swing trading strategy. The more familiar you are with the factors, the higher the chances that you can swing trade successfully.

The next couple of points highlights some of the important things you should bear in mind when you’re swing trading.

Understanding the technical indicators

Having a good understanding of the technical indicators is essential when you want to swing trade. The more familiar you are with the technical indicators used, the better your chances of success.

Think of this as knowing your automobile inside out. For example, if you were on a long ride and the vehicle breaks down, knowing what went wrong and how you can fix it can help you a great deal.

Swing trading is no different. When you have a good understanding of the technical indicators, you are in control and better able to manage losing trades.

Many traders often focus on a strategy based on technical indicators. They do not question why the indicators are used. As a result, if you look around the internet and especially the various trading forums, you will find dedicated threads to trading strategies.

While more focus is given on the performance of the trading strategy, it is very rare that you will find someone asking about why those specific indicators are used. This leads to a trading strategy using redundant indicators.

It so happens that at the end, the trading strategy uses so many indicators that the main aspect, the price gets clouded in the confusion.

Therefore, as a first rule, to be successful with swing trading you should first understand the indicators that you will be using.

Know what you are trading

A trading strategy can often be used across different instruments and even in different markets. While this is fine, if you do not understand the market that you are trading then swing trading can be disastrous.

The reasoning behind this is that different markets have different characteristics. We can define these in some ways such as the day to day volatility, the establishment of trends and the factors that affect the volatility. Liquidity and the liquidity times are also important if you consider the aspect of spreads and trading order fills.

If you are not familiar with the markets, you are trading them over a period of time you are prone to make mistakes.

When you have a good understanding of the market that you are trading, it will help you to develop the fundamentals of it as well. While technical analysis deals mostly with past price action and how it can predict future short term price, fundamentals are important.

It is the fundamentals that form an important aspect of driving the markets in the way they do. Therefore, focusing on the fundamentals such as the economic reports, seasonal reports, monetary policy decisions and so on plays an important role.

As you can see, with swing trading there is a lot more than what meets the eye. Swing trading is not as simple as just throwing in a trading strategy and then blindly trading based off the signals that you get.

Keep your emotions in check

Emotions play a big role when it comes to swing trading. This is because your positions are held open overnight and over a few days if not weeks. This makes you prone to the two main emotions, fear and greed.

On a day to day basis, the markets are also reacting to new pieces of news. As you might already know, the price of the instrument already discounts the news. Thus, on a macro level a solid news report on one day followed by a negative news report on the next day can result in the instrument showing strong swings.

This is also known as volatility in the markets. On such days, you might lose sight of the longer term trend. Price may post a correction and with swing trading, it could lead you to worry whether the trend is changing.

When emotions such as fear and greed take over, you will not see much success. Regardless of how good your swing trading strategy is, chances are that your emotions will over-ride the logic. The tricky thing about emotions in trading is that sometimes you might be right. But for the most part, you might just get it wrong.

Imagine having a swing trade position open with just a few more pips to reach your take profit. A bout of good news might compel you to get rid of the target price and keep the position open. This emotion, also known as greed can become your greatest risk.

While there is chance that you can make more money than initially thought, there is a risk that the markets could reverse and end up in your position being closed at lower profits, if not losses.

Risk management

It is said that good traders manage risk and bad traders chase profits. With swing trading, the truth couldn’t be further than this.

Risk management is an essential aspect of swing trading. Because your trades are open overnight you need to be adept at managing the risk. This is somewhat different from the typical approach adopted with day trading strategies.

With day trading, you enter a trade, set up the stop loss price and set your target price. The trade either hits your profit level or gets stopped out. With swing trading, there is a good chance that the trade can move in your favor only to reverse gains and turn negative.

What do you do under these circumstances?

Risk management gives the answer. Risk management is also used interchangeably with another term called position management. They are essentially two sides of the same coin. A good way to manage your risk is to split your trades so you can individually manage your positions.

This will ensure that you take regular profits without being compromised by the emotional aspects of trading. Having a good swing trading strategy that also encompasses the risk or position management can do wonders.

But in order to develop such a swing trading strategy, you need to be fully in control and knowledgeable about what you are trading and the tools or indicators that you are going to use. This fits in perfectly with the first two points outlined in this section.

Trading fees and other costs

Using a swing trading strategy requires you to also focus on other things such as the trading fees that you will incur. For example, if you were to trade the currency markets and your positions are held overnight, you will incur the overnight swap rates.

Over a period of time, these swap rates that are credited or debited to your account depending on the direction that you are trading, and the swap rates applied can eat into your profits.

This means that you should also pay attention to your account leverage and the spreads. Depending on the type of broker you choose, be it a fixed spread or a variable spread broker, your swing trading strategy should also account for this.

This issue gains more importance when you are using a variable spread broker or an ECN or STP broker. During times of low liquidity, the spreads can widen. Depending on where you place your stops and target levels, they can be easily hit.

As a rule of thumb when you are starting out with using a swing trading strategy, it is important that you stick to the more liquid markets regardless of the time. This will ensure that your trades are not prematurely closed out simply due to illiquid markets resulting in wider than usual spreads.

Black swan events

As a swing trader, you should be aware of the fact of Black Swan events. Black swan events come unannounced and can wreak havoc on a trading position that would have resulted in your favor. There are different types of black swan events.

For example, in the currency markets, you can experience fat finger events. These are events when an unusual order be it human or due to algorithms can cause strong price action movements. There are no valid fundamental explanations behind these movements.

The fact remains that these events can make your open positions vulnerable and could lead to big losses. Even if you take comfort in the fact that you are using stop losses, the strong volatility can mean that your stop order is not filled. This would put your trading capital at risk.

Some examples of Black Swan events include the sub-prime mortgage crisis in the United States which resulted in a global financial crisis. On a smaller scale, the Swiss National Bank announcing that it was removing the EURCHF peg was another such incident that affected many traders, including both day traders and swing traders.

Although Black Swan events are not that rare, this is a risk that you should consider when you want to use a swing trading strategy.

Difference between swing trading and day trading

Swing trading is not the choice of many and there are different reasons behind it. For one, a trader might not prefer to use a swing trading strategy because their lifestyle does not allow it.

Another reason could be that swing trading requires a lot of time and effort. Traders these days prefer quick solutions and thus swing trading might not be that appealing.

For many, trading is random. When a market or an asset is making the news, day traders often flock to such markets and day trade. A good way to illustrate swing trading is that with this approach, you are like a sniper. Taking your time to assess various parameters such as the distance, the wind, elevation and other things.

With day trading, you are more like the chap in the wild west movies. Shooting from the hip. It can be a hit or a miss.

One of the big advantages of utilizing a swing trading strategy is that you are able to build consistency to your trading. Consistency in trading is the most essential aspect towards building you long term success.

While grabbing a few big winners every now and then with day trading can boost your ego, it is erratic as best. The big winners will disappear with the same ease.

In swing trading, given the time that you invest in analyzing the market and the strategy you employ, you can become more consistent in trading. In the financial markets, including forex, the more consistent you are in making profits, the better your chances that you will see steady returns on your investment.

Of course, as you can imagine, swing trading can become a bit boring compared to the day to day returns you can see when day trading. However, boring can be a good thing. No one will dislikes making money boringly. You’re not trading for the sake of seeking thrills and excitements! Just to make money.

How to build swing trading strategies

So far, we outlined the risks and the factors that you should consider before using a swing trading strategy. We also covered the subtle differences between day trading and swing trading.

In this section, we will discuss how you can build a swing trading strategy.

A trading strategy is nothing but a trading plan that you will make. In the strategy your main goal is to enter at a price, set your stop loss and your profit target. So far, it does not sound any different from day trading.

But here is where the difference ends.

The first step to consider when building swing trading strategies is how you want to trade.

Trading can be essentially divided into two kinds.

  • Trend trading
  • Counter-trend trading

There are pros and cons with both these approaches. So now the question is what is more profitable for you and easier to handle.

Trend following swing trading strategies

A trend trading strategy in the context of swing trading typically means that you are trading in the direction of the trend.

Trends, as you know form across different time frames. If you pull up the longer-term trends such as the primary trends, these tend to last over years. The medium-term trends are those that range over a few months. Finally, the short-term trends tend to span from a few weeks to a few months.

With swing trading strategies, when you employ a trend following approach, your primary goal is to ascertain the trend.

Your job does not end there. The next question you will be asking is what stage of the trend you are looking at.

It is important to point out that in real time there is no way to tell if the trend is starting or ending or will continue. This can happen only in hindsight. This is where having a good swing trading strategy can help. By combining the elements of position management, you will be able to better manage your trade.

In the world of financial trading, you might have come across the phrase that the trend is your friend. This is quite true. The reason behind this is because when you are following a trend, you are in the majority of the trade.

So, the thinking is that you can’t really go wrong here. However, you can go wrong if you enter a trend at a wrong time. Price doesn’t move in a straight direction. It tends to move in corrective phases. As a result, if you entered a trend right near the start of a correction, you might have to deal with big losses.

The best way to avoid this is to make use of some technical indicators that can help you. Below are some trend based technical indicators that can help you.

  • Bollinger bands
  • Moving averages
  • Envelopes

Using any of the above commonly found trend-based indicators can help you to first figure out the direction of the trend.

Of course, you can also use price action-based methods such as higher highs and lower lows and/or trend lines for instance.

Once you identify the trend, the next stage is to use a compleimenting indicator or an oscillator. A technical oscillator basically shows you if the momentum is exhausted or if the momentum is starting to build up.

This is important because most of the turning points in price occur due to building momentum or falling momentum.

Just by using these two combinations you can get a fair idea of whether a trend is entering a correction or if a correction is completed and the trend is resuming.

A famous example of a trend following swing trading strategy is the Turtle trading strategy.

Counter-trend swing trading strategies

Counter-trend based swing trading strategies require a different approach. In this case, as the name suggests you are trading against the trend. There are some inherent risks here. However, the risk is justified by the fact that you are able to capture some big price movements.

Counter-trend swing trading strategies are not suitable for all traders. You need to have a certain level of familiarity with the markets and also to be more risk tolerant. A counter trend swing trading strategy is akin to catching a falling knife, as it is usually said in trading circles.

You can never be too sure. A counter trend move in price is typically weak but can be rapid. The primary trend is the dominant trend, so it doesn’t take much for price to pause in its correction and resume the trend.

These erratic moves can make your counter trend swing trading strategies very risky. But with the risks, the rewards are equally the same.

When comparing a counter trend swing trading strategy and a trend following swing strategy, you will find that your trades are closed out much quicker with a counter-trend following strategy. This is because corrections are usually quick and shorter in time span compared to the primary direction of the trend.

There are also significant differences in other aspects such as position and risk management.

The biggest benefits of using counter-trend following swing trading strategies is that this allows you to capture profits relatively easily.

In terms of the technical indicators that you will use, counter trend-based swing trading strategies can employ the same set of technical indicators. Except that instead of trading in the direction of the trend, you just trade the counter or corrective phases of the trend.

How to put your swing trading strategies to the test?

Considering that you have now managed to build some swing trading strategies, you should put your concept to the test. If you frown upon this, then let us make a simple illustration.

When a new car is designed, or for that matter any new gadget, it is often tested thoroughly to its limits. This will give a better view of how to use the vehicle or the gadget that was designed.

The same holds true with swing trading strategies as well.

Back testing and forward testing your strategies

Demo testing is the best place to start with. Because your swing trading strategy uses multiple indicators, look for ways on whether you could automate some of this. This could mean having to design a custom trading indicator that will alert you to the conditions.

While the temptation to automate a swing trading strategy is strong, it is always best to only partly automate the strategy. This ensures that you are still in control and can bring some outside knowledge to a trading strategy that would otherwise merely become a set of rule-based swing trading system.

Back testing your swing trading strategies is a great way to test the efficiency of the trading system that you developed. This will potentially reveal to you any risks that come with using the swing trading strategy.

You can also learn valuable information such as position management and how to better manage your risk.

However, do not compromise your swing trading strategy too much by over fitting to past data. Most often traders end up tweaking their strategy only to ensure that in back testing it shows great results. But when it comes to forward testing, the results might differ.

Forward testing is the next step of testing your swing trading strategies. Forward testing simply means trading based off your swing trading system in real time to see how the strategy performs.

These days, there are many trading tools that can enable you to automate your trading systems to a certain point, which you can take advantage of.

Rinse and repeat

Once you have done your due diligence, your job doesn’t end there. With swing trading, you need to constantly evaluate your strategy. This means having to tweak some parameters or adding new technical indicators or trading rules to keep your system consistent.

This is no different from maintaining your automobile for example. The better condition it is in, the higher the chances that the automobile will serve your purpose.

Therefore, revisiting your swing trading strategies at regular intervals and running the whole cycle of back and forward testing is essential.

How to use swing trading strategies – Conclusion

Wrapping it all up, swing trading certainly requires a lot of work and effort. You might have heard of the statistics that more than 90% of retail traders end up losing money. This is due to the mindset that people think trading is easy.

As pointed out in this article, trading requires a lot of effort and dedication. Swing trading requires a bit more than that, but it can set you up for consistent trading results. Developing swing trading strategies requires investment in terms of time and patience. You can also expect to see some investment in terms of hiring a developer or a coder to partly automate your swing trading strategy.

The above guide provides a brief but an elaborate overview of the concepts of swing trading strategies. This should provide the reader a good starting point. From here on, you can start to explore the world of swing trading and be on your way to developing your own swing trading strategies.

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I'm Mike Semlitsch the owner of My trading career started in 2007. Since 2013 I have helped thousands of traders to take their trading to the next level. Many of them are now constantly profitable traders. 

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