Forex Trading Guide
Forex primarily involves currency exchange. The fluctuation in the foreign exchange market is utilized with leverage, allowing forex traders to make significant profits or losses. Foreign exchange occurs for several reasons, including tourism, trading, and commerce. As of April 2019, daily forex trading volume hit a staggering $6.6 Trillion, making it one of the largest and most traded assets.
The forex market is the world’s marketplace for trading national currencies. Forex traders trade currencies against each other in what is commonly known as exchange rate pairs. Suppose a trader says they’re trading GBP/EUR. In that case, GBP/EUR is their currency exchange pair. Simply put, the trader is trading the British pound against the euro.
As one of the most popular trading assets, many traders often find forex as their starting point. If you’re new to forex trading, don’t worry. This article will guide you through forex swing trading, including the best strategies and everything you need to know about it. It will help you start the journey to forex trading.
Forex Brokers for United States
What is Forex Market?
The forex market is the marketplace where traders trade currencies. Currencies play a crucial role in the economy because people can transact effectively locally and across borders. However, you must exchangeinternational currencies before conducting a foreign business and trade.
For instance, if you’re traveling to Egypt as a U.S tourist, you can’t pay in U.S dollars to view the famous Egyptian pyramids. In that case, you must convert your currency to the Egyptian pound.
One aspect that is unique to the global market is there is no central foreign exchange marketplace. Instead, currency trading is done digitally over the counter (OTC). Therefore, all forex transactions occur through computer networks, connecting traders all around the globe.
How To Trade Forex
There are three basic ways of trading forex, namely spot, futures, and forward markets.
Spot Market
Spot market foreign exchange is the largest forex trading approach. The case is so because it involves the exchange of the largest underlying actual asset for the futures and forward markets. This way of trading received a significant boost due to the increased number of forex brokers and electronic trading. When swing forex traders discuss the forex market, they are simply discussing the spot market.
How Does Spot Market Work?
The platform where traders buy and sell currencies depending on their trading prices is the spot market. The trading price is primarily determined by global demand and supply. Therefore, before considering swing trading forex, you must be conversant with demand and supply analysis.
The spot market is calculated by accounting for several factors: economic performance, political situations (internationally and locally), present interest rates, and the future performance perception of a specific currency against another.
A spot deal is an accomplished deal. It’s a bilateral transaction involving two parties. One party delivers the agreed currency amount and receives a specified amount in another currency based on an agreed exchange rate. Once the position is rendered complete, the settlement is made in cash. Despite the spot market being recognized as one that deals with present transactions, such trades can run for days.
Futures and Forward markets
A futures market is a regulated agreement between two stakeholders to deliver a currency in the future but at a pre-established price. On the other hand, a forward market contract is a privatized agreement between two sides to purchase a currency in the future, but at a pre-decided price.
Now that you’ve learned about some basic forex introduction concepts let’s dive into our main subject focus, forex swing trading.
What is Forex Swing Trading?
In our definitive swing trading guide, we discussed swing trading as a trading style involving traders holding their trades for several days to weeks. Forex swing trading is a moderate-term trading approach utilized by forex traders to generate profits from swings in currency prices. Forex swing traders identify potential trends and hold their trade(s) for a specific period to achieve these profits.
Forex swing trading requires a bit of patience because, as a forex swing trader, you’ll have to wait for several days before closing a trade. This trading style stands between three other famous approaches: position trading, scalping trading, and day trading.
Is Swing Trading Profitable?
Many people often ask, can swing trading make you rich? Well, YES. Forex swing trading can actually make you rich. Forex swing traders profit from many small wins that can result in significant returns when summed up. While traders using other trading styles can wait six months, only to make a 30% profit, forex swing traders can earn 4.5% profits weekly.
If you sum up those gains over those six months, they will exceed the profit made by the other trader. However, you cannot make these riches without learning to risk and invest strategically. That’s why traders adopt a forex swing strategy to enhance their chances of winning in most of their trades. Any trading comes with risks and you shouldn’t trade with assets you cannot risk to lose.
Swing trading in forex requires traders to use technical indicators or fundamental analysis to determine if the price of a specific currency pair may go down or up in the future. This analysis helps them make informed and market-sustainable swing trading decisions. The next section will address some key technical analysis tools used by forex swing traders.
What is a Forex Swing Trading Indicator?
An indicator in swing trading is tools used by traders to spot new trading opportunities.Swing traders aim to benefit from mini trends that alternate between lows and highs and vice versa.Therefore, they must identify new momentums as soon as possible to avoid missing opportunities. That’s the core reason why they use the power of various technical indicators.
There are two primary types of trading opportunities that forex swing traders utilize technical indicators to identify: breakouts and trends. Breakouts are the starting points of a new trend. On the contrary, trends are the long-term stock market moves that contain short-term swings. Here are some forex swing trading indicators that traders should know.
1. Volume
This technical indicator plays an integral role in providing insight into how strong a trend is. As a technical analysis tool, the volume uses simple logic; the high the volume, the stronger the movement, and the weaker the volume, the weaker the trend. If more forex swing traders are selling or buying, there must be a better basis behind such price action.
Forex swing traders find volume as a valuable indicator as a fraction of the breakout strategy. Typically, breakouts follow a consolidation period that is accompanied by a small volume. Once the breakout stabilizes, the volume spikes.
2. Moving averages
Traders use moving averages to calculate the market’s price movement average over a specific timeframe. Doing so results in the smoothening of any irregular short-term spikes. Moving averages are also called lagging indicators becausethey reflect over the past price movement. The shorter the time covered by the moving average, the less it lags.
Forex swing traders use moving averages to confirm trends rather than predicting them. The figure below shows a moving average.
Moving averages fall into three categories based on the number of periods they analyze, as shown below.
| Moving average category | Periods they analyze |
|---|---|
| Short-term | 5 to 50 |
| Medium-term | 50 to 100 |
| Long-term | 100 to 200 |
They come in two major types, simple moving averages, and exponential moving averages. Simple moving averages combine all the trade closing prices within a given time frame and finds the mean. On the contrary, exponential moving averages provide more weight to prices closer to the present date.
Which moving average is suitable for swing trading?
Many traders ask this question to determine the best moving average to adapt in forex swing trading. The following is what you need to know to assess your choice moving average for forexswing trading.
Although the difference between the two moving averages is only speed, the moving average you choose can significantly impact your trading outcome. Exponential moving average (EMA)moves faster and changes direction earlier than simple moving average (SMA). The case is so because EMA primarily focuses on the latest price action. That being the case, if a price change occurs, the difference quickly reflects on the EMA than SMA.
Pros and cons of moving averages
To determine the best moving average that suits your forex swing trading needs, you need to scrutinize the benefits and setbacks of each choice. Ironically, the benefits of each moving average are also its weaknesses.
To put it into context, EMA responds faster to price changes, allowing you to spot price patterns earlier. You can trade your currencies appropriately and make significant profits if the trend continues. However, suppose the price of a specific currency retraces because of a particular reason, like a rally. In that case, the exponential moving average starts shifting downwards instantly. Therefore, it can reflect a shift in direction too early, giving premature and false signals.
On the other hand, SMA shifts slightly slower. It keeps you in trade for a more extended period when there are abrupt price changes or erratic behaviors. Therefore, you’ll get in a trade later compared to other forex swing traders using EMA. However, SMA offers more accurate forex swing trading signals, especially during highly volatile periods.
So, in the end, the best moving average for forex swing traders is determined by you. It depends on what makes you comfortable and your preferences.
3. Relative strength index
Forex swing traders often rely on momentum indicators because they highlight possible oscillations in a wider trend. Relative strength index (RSI)is one of the most used momentum indicators because it shows whether a specific currency pair is oversold or overbought.Therefore, a forex swing trader can determine whether there might be an upcoming swing on the horizon.
RSI computes the size and number of the forex market’s negative and positive closes within a number period (typically 14). It is usually represented as a swing. Check the chart below for a more visual idea.
4. Stochastic oscillator
Another commonly used forex swing trading indicator is the stochastic oscillator. It works similarly to RSI. Stochastic oscillator compares forex market’s closing price to thebroad price ranges within a specific period.
It is represented on a chart that ranges from 0 to 100. Any reading beyond 80 is labeled as overbought. On the contrary, all readings below 20 are considered oversold. The stochastic oscillator has two lines. As shown below, one represents the present oscillator value, while the other represents a three-day moving average.
An oversold or overbought reading doesn’t imply an imminent reversal because stronger trends can remain in one territory over a long period. Therefore, many forex swing traders monitor where the two lines crisscross. They take such crossovers as a hint that a reversal might be underway and identify it as a more accurate forex swing trading indicator.
What are Swing High and Swing Low in Forex Swing Trading?
As a forex swing trader, it is imminent that you will meet the words swing high and swing low. So, you need to have a clear understanding of what they mean.
- Swing high– This is when the forex market hits the peak before it starts retracing. This swing level provides forex swing traders an opportunity to trade short (sell).
- Swing low –It is the situation where the forex market hits bottom and starts to bounce. This swing provides an opportunity to place long trades (buy).
Top Forex Swing Trading Strategies
There are several forex swing trading strategies that forex swing traders adopt to earn returns. However, deciding the best forex trading strategy is primarily up to the trader. It all depends on what type of trader one is. Here are some best forex swing trading strategies that work.
1. Trend Trading
This is the most basic, safest, and best forex swing trading strategy for beginners.Trend trading involves spotting how prices are going down or up as steps and not linear fashion. This forex swing trading strategy focuses on exploiting bullish trends. This implies monitoring trends to spot where the currency pair price starts from a low point and trends upwards.
This way, you can identify the perfect trade entry point. Typically, trend trading profits are higher than losses. This factor makes the safest of all and the best forex swing trading strategy.
2. Counter-Trend Trading Strategy
This forex swing trading strategy is the opposite of trend trading. It involves attempting to spot trends turning downwards and bearish instead of an uptrend. Counter-trend trading is riskier and more complex than trend trading because you must have significant discipline and easily miss forex swing trading signals. This way, it will lead to a missed opportunity to make a profit.
3. Moving Average Trading Strategy
This forex swing trading strategy involves focusing on average periods. This is followed by making forex trade moves based on those averages. The moving average forex swing trading strategy requires the forex swing trader to have some crucial analysis skills. Therefore, it is not suitable for beginners.
4. The Bollinger Band Forex Swing Trading Strategy
This forex trading strategy involves using multiple indicators (usually 3) to identify a potential turning point when you can make your trade.Forex swing traders assess the three turning points identified from each indicator to determine potentially profitable (ideal) forex entry points.
Decisions are based on how these points move down or up the bands. Therefore, this strategy requires you to have crucial technical analysis skills.
5. EA Trading
Technology is taking over every sector.It has influenced the forex trading industry. EA trading strategy is whereby a forex swing trader uses an expert advisor to make their trading decisions. The expert advisor, in this case, is software that informs you when you should make trades. Forex EA traders can even set the software so that it can launch and execute trades on their behalf based on their criteria.
Quick Tips to Start Forex Swing Trading?
If you’re new to forex swing trading, there are some crucial things that you need to know to achieve a great start to your forex trading career.
- Learn more about forex before you start trading.Regardless of swing trader’s trading style, you need to learn basic forex trading concepts to avoid missing crucial points. The best thing about it is that there are various online forex training courses available. So, you don’t have to worry about finding a forex trading tutor.
- Create a forex brokerage account– You must own a forex swing trading account to get started. You can search local forex brokers within your reach and find regulated brokers.
- Create your trading strategy– As previously discussed, there are multiple forex swing trading strategies available.Forex swing traders cannot always forecast and time forex market movement. However, creating your swing trading strategy helps establish a broad forex trading roadmap and guidelines. A functional forex trading strategy is centered on your financial and situational reality.
- Always check your numbers –As a forex swing trader,check your trade’s positionat the end of each day. Most forex swing trading systems provide a daily trades accounting.
- Practice emotional intelligence–Forex swing traders, especially beginners, face many unanswered questions and emotional challenges. Therefore, it’s worth mentioning that you must train yourself to always stay in control of your emotions during forex swing trading. Don’t be carried away by your present trading position. Instead, nurture emotional intelligence across losses and profits. Always stay disciplined.
Conclusion
To be a successful forex swing trader you need is to adopt the right fundamental or technical analysis tools and identify the best forex swing trading strategy. However, you must cultivate emotional intelligence and stay diligent to increase your odds of making a profit. Remember that all trading comes with risks.