The Swing Trading Forex Strategy
Swing trading is all about identifying forex currency positions suggesting that a trend may end, and a new one may begin. A swing trading strategy differs from others in that it can span as long as two weeks. As such, the strategy requires an investor to be patient, remaining optimistic in the hope that the strategy will work. However, this is not the only factor to keep in mind when adopting a swing trading strategy. The strategy involves multiple stages, where investors are required to buy or move particular sums of currency. As such, swing traders will need to understand the important nitty-gritties of risk management.
The primary component of the swing trading forex strategy involves understanding the currency market to determine when a trend is about to end, with a new one developing. Efficient swing traders are able to advantage themselves within these positions so as to increase their gains.
There are a variety of strategies that investors can use, but all of them involve understanding how a trend works. Typically, the beginning of one trend will signify the end of another. During this crucial period, investors with different strategies will fight it out within the market to determine which way the new trend will move, as well as the gradient of this trend. The swing trading strategy is more effective in markets that exhibit limited volatility over time.
The popular Elliot Wave theory
The Elliot Wave theory is one of the most popular among swing traders. The analysis is used to interpret and explain why currencies are likely to move higher during a particular trend, before returning to more stable movements. The tiny swings during these currency corrections are termed, ‘waves’ and these are the points where swing traders will be required to act.
The Elliot Wave theory essentially consists of five predominant positions in the life of a trend. The first of these positions will be noticed when the currency makes a small yet noticeable movement in the opposite direction of the trend before returning to its original upward or downward gradient. At this point, swing traders will immediately be alerted to the fact that a trend may be changing entirely. This stage is known as the ‘pull back’ stage, and most swing traders will want to enter the market here.
The second stage will involve selling or buying currency against the ‘pull back’ stage ergo in favor of the original trend. This will cause the initial slump to correct itself and return to the normal trending pattern. There are a number of tools and techniques used by swing traders to identify the opportune moment to enter the market, one of these being the candlestick method.
The third stage of the theory is usually touted as the most important. During the third stage, there will once again be another ‘pull back’, suggesting that the trend is likely to change imminently. Once again, a swing trader will buy or sell against the pull back. The fourth stage will resemble the second, and the currency will once again imitate the gradient of the original trend. Finally, the fifth stage will mark the end of the trend. After the fifth stage, the trend is likely to reverse or change directions.
The importance of trend lines
Any swing trader will tell you that trend lines are extremely important. Trend lines used by swing traders can help determine, of course, that a currency is exhibiting a particular trend, but also help in identifying positions of resistance and support. Typically, a swing trader will look to draw trend lines connecting the highs of a currency with other highs, and the lows with other lows. What is important to keep in mind here, is the timeframes used in demarcating these trend lines.
The longer the timeframe used, the more likely it is that the trend line is real and accurate. Many swing traders opt to use daily or four-hourly price charts to catch the trends when they are about to shift, by identifying significant price fluctuations. This strategy is known as “buying into the dips”, and is used in order to activate a perfect position for a larger swing trade in the near future.