Swing trading is one of the forex trading methods considered effective, helping investors achieve high profits and minimize risks, even when predicting the market is wrong. So, what is swing trading? What are the advantages and disadvantages of these methods? Let’s find out more details about Forex Trading in the next section!
What is swing trading?
Swing trading is known as a medium-term trading style. The goal is to hold positions for several days to weeks in search of larger profits over long time frames. Unlike day trading and scalping which rely solely on technical analysis, swing trading combines both technical analysis and fundamental analysis to predict price trends. Swing traders often use H4 or D1 charts and only open orders when there is a high probability of winning, usually 70% or more.
Besides, you should also know what is arbitrage to better understand the Forex market. Arbitrage trading is buying Forex in one market and selling it in another market at a higher price. Generate profits from temporary differences in prices. This is considered a risk-free profit opportunity for investors or those participating in Forex trading.
See more: Learn Dow theory for trading beginners
Principles of Swing Trading
- Principle 1: Identify the main trend of a stock or market and invest in that direction.
- Principle 2: Buy when the market is oversold, sell when the market is overbought (using the RSI indicator).
- Principle 3: Choose the entry point.
Advantages and disadvantages of Swing trading
Any investment method has benefits and risks, and swing trading is no exception. Here are some common advantages and disadvantages of this method:
Advantages of Swing Trading
- Trading costs such as spreads and commissions are lower than day trading and scalping.
- Save time as there is no need to monitor the market every minute. This helps reduce stress and free up time for other activities.
- Profits from swing trading can range from 20 to several hundred pips per trade entry. Maximizing short-term profits is easier when capturing large fluctuations in the market.
- It is possible to use technical analysis alone to find profits.
What are the disadvantages of Swing trading?
- Opening positions overnight or over the weekend creates high risks. Because of the possibility of gaps appearing, the account can suffer heavy losses.
- The cost of holding an order overnight is higher than scalping and day trading because of overnight expenses.
- Requires high analytical skills and reading market psychology.
- It is possible to miss long-term trading opportunities because swing trading is aimed at medium and short-term transactions.
Who is swing trading suitable for?
This strategy is simple so it seems that every investor can apply it to forex trading.
Would an experienced trader choose swing trading?
This trading method requires a combination of technical and fundamental analysis. Therefore, experienced traders, knowledgeable about the market and proficient in using technical indicators will be more suitable.
If you are a new trader who wants to test this trading style, take the time to research, learn, and practice on a demo account.
Swing Trading Strategies
So what swing trading strategies are there to maximize your profits? Let’s look at one of the strategies below:
Fibonacci retracement trading strategies
Fibonacci retracement levels are based on the Fibonacci sequence, which are important support and resistance levels. They help traders plan their entry and exit into the market effectively. This retracement measures the retracement of a previous movement, often defined by percentages such as 23.6%, 38.2%, 50%, 61.8%, and 78.6%. In swing trading, they help identify retracement points on the price chart. Usually accompanied by reverse movements before the trend continues.
Bollinger band method
Bollinger Bands reflect the direction of the market based on price. With three bands representing the upper level, lower level, and moving average. When prices move upward, the market is often in an overbought state. Conversely, when the price falls below the lower band, the market is often in an oversold state.
They are often used in conjunction with relative strength indicators or RSI and bandwidth indicators. With positive and negative standard deviations, in about 95% of cases, prices move within this band. The 20-day moving average is often considered suitable for trading with Bollinger Bands.
Breakthrough strategy
As one of the popular strategies in the global market, the breakout swing strategy requires good technical analysis skills. This strategy focuses on identifying and capitalizing on disruptions in the market. Traders use tools such as trend lines, support, and resistance levels. Along with chart patterns like triangles and flags to identify potential breakouts. Stocks or assets that are likely to move strongly will become targets. Traders often look for strong volume signals, as their reliability is higher.
MACD crossover
MACD is a popular tool favored by swing traders to identify trends. To use MACD for trading signals, we are interested in two main lines: the signal line and the moving average. When the moving average crosses the signal line from bottom to top, it is a buy signal. When cutting from top to bottom, it is a sell signal. However, it is important to note that this signal can be slow and by the time it occurs, the trend has been going on for quite a long time.
Support and resistance
On the price chart, support and resistance lines are important to watch. They represent changes in the direction of price. The support line indicates a falling price range below the current market price. While the resistance line indicates a price range above the current price level. The support range indicates a decline in price as buyers begin to enter, while the resistance range is a seller’s market.
See more: Together XM Forex: Master the game, increase income
What are the things to note when trading with Swing Trading?
To increase the likelihood of success and avoid falling into traps when trading using the swing trading method, investors should note the following points:
- In addition to using moving averages, the RSI indicator is also an important tool to help evaluate the market.
- Regularly following the news is necessary to deal with unforeseen market fluctuations.
- Never skip setting stop loss to protect your investment capital from unexpected fluctuations.
- Diversifying the size of your transaction helps minimize risk, avoiding placing too much hope in a single transaction.
- Train yourself to be calm and patient, and avoid being swept away by emotions when encountering profits or losses.
- Capital management is an important principle, always maintain your investment capital to avoid the risk of “going out of pocket”.
In addition, understanding what is dow theory can also help you have a more general view of market trends. The Dow Theory was one of the first to recognize that the Forex market moves in trends that have different phases. It clearly outlines the types of trends that the market typically experiences.
Conclude
Swing trading is a method suitable for volatile markets and trend-following traders. However, to apply this method, you need to have skills and experience analyzing the Forex market. Through this article, Forex Trading hopes you have a clear understanding of Swing trading. Be aware of its advantages and disadvantages to build a trading strategy that suits you.
FAQs
What is the most successful swing trading strategy?
Successful traders are disciplined and focus on a good risk-reward ratio. Popular trading patterns include triangles and strategies such as Fibonacci Retracement and Trend Trading. Each person chooses a strategy based on personal needs and goals.
Is swing trading a good strategy to make profits?
Swing trading can provide short-term profit opportunities. However, there are also potential risks on weekends and overnight. Setting stop-loss options is extremely important to minimize losses. Especially when the market fluctuates unpredictably.
Which time frame is best for swing trading?
Popular timeframes are weekly, daily, 4-hour, and 1-hour. Staying on the 1 hour and daily time frame is considered best. However, each person has their own approach. It is important to choose a time frame that suits your plan and pace in trading.
