Forex trading swing strategy

How do traders and analyst create profitable Swing Trading strategies in forex?

There are numerous opportunities for creating profitable swing trading strategies in the forex market. Although many swing traders focus on anticipating the breakout after a period of consolidation, channel trading is arguably one of the simplest swing strategies to implement. When a currency pair trades within a defined price channel, whether bullish, bearish or trendless, the consistent oscillation of price between support and resistance levels offers multiple opportunities within a relatively short period.

To take advantage of this swing trading strategy in the forex market, first look for currency pairs trading within a channel. A price channel is defined by drawing trendlines between two or more swing highs and swing lows. On a bearish chart, this means price oscillates between lower highs and lower lows, forming a downward sloping channel. On a bullish chart, the opposite is true. If a currency pair exhibits no clear trend and price moves between two horizontal lines of support and resistance, it is said to be range-bound. Once the channel is identified, implementing this swing trading strategy is as simple as going long when price touches the support level and selling long positions or entering short positions when it touches resistance.

For example, assume the USD/EUR currency pair levels out after an uptrend and trades sideways for a period of weeks. After three similar swing highs and lows, price establishes a channel between 1.51 and 1.60. As price approaches the lower channel boundary at 1.51, enter using a market order or a limit order set at this support level. A stop loss set below support can help protect your investment from an unexpected breakout. As price swings back up through the channel, prepare to exit your long position with a limit order set at the 1.60 resistance level. A short position can also be entered at this point in preparation for the downswing. Set stop-loss orders just above resistance.

Forex swing trading strategies that work.

Swing trading is a style that operates over short to medium time frames.

It lies between the very short time frames of day trading and the longer time frames of position trading:

It's not so short that it commits all your time to monitoring the market.

Yet it is short enough to provide plenty of trading opportunities.

You can get an overview of the style in What is Forex Swing Trading.

Today we are going to dive deeper into swing trading strategies, to illustrate the risk factors and benefits involved.

We'll start by looking at a few simple Forex swing trading strategies, then investigate how to build more complex versions.

And remember that this is not our only educational resource for learning swing trading strategy:

. our cost-free webinars cover this topic and many more.

Simple swing trade strategy explained.

Swing trading is a style, not a strategy.

The time frame defines this style and within that, there are countless strategies we can use to swing trade.

are not exclusive to swing trading, and as is the case with most technical strategies, support and resistance are the key concepts.

These concepts give you two choices within your swing trading strategy including to:

follow the trend, or trade counter to the trend.

Counter-trending strategies look to profit when support and resistance levels hold up.

Trend-following strategies look for those times when support and resistance levels break down.

For either type, it's useful to have the ability to visually recognise price action.

A quick word on price action:

. markets don't tend to move in a straight line.

Even when ultimately trending, they move up and down in step-like moves.

We recognise an uptrend by the market setting higher highs and a downtrend by lower lows.

Many swing trading strategies involve trying to catch and follow a short trend:

. but we will also look at trading counter to the trend.

Look at this hourly chart of EUR/USD.

The chart shows an uptrend that lasts around a week and it moves with a typical zig-zag pattern.

The price rises for a few hours and then is interrupted by some periods of decline.

After this, the upward progression continues.

These steps combine so that the overall movement is higher.

Generally, we are seeing higher highs being achieved.

The lows are also generally rising.

Though the overall trend is up, there is a stretch in the middle (from early on 12 July through to 10.00 on 13 July), where there is a pullback or reversal .

During this period, the market is not setting new highs while the lows are moving lower and lower.

After this countertrend period, the upward trend resumes.

So with this eyeball method, we are looking to catch the bullish swing:

. but only when we are confident that it is going to continue.

How long will a pullback persist?

We have no way to know.

Instead we look for confirmation that the market has gone back to its original trend.

In other words, we:

look for a trend wait for a countertrend enter the market after we see the countertrend has played out.

The tell-tale signal that we are seeking, is a resumption in the market setting higher lows.

This suggests the pullback is over.

So we would be buying EUR/USD around 16.00 on 13 July.

At this point we've seen the market setting increasingly higher highs:

. and just as importantly…

. we've seen the lows of each period also rise.

Let's say we buy in at 1.1082.

Our first version of this strategy places a stop-loss at the lowest point of the previous countertrend.

This level was struck at 10.00 on 11 July and was 1.1042.

So our stop goes at 1.1042.

We are risking 40 pips.

The strategy is simple and aims for a risk-reward ratio of 1:2.

We are risking 40 pips, so we place a limit 80 pips higher at 1.1162.

This price is reached between 14.00 and 15.00 on 14 July, when the market hits a high of 1.1164.

Your limit is filled and you make a profit of 80 pips.

A second version of this strategy would try and run the profits even further.

In the second strategy, we do not set a limit.

Why don't we use a limit?

Because we want to run our profits for as long as we can.

We don't know how long the trend might persist and we don't know how high the market can go.

So we will not try to make a prediction by setting a price target.

But we do know that prices don't go straight up.

This means you have to allow the market to move adversely to some degree, to properly ride the trend.

This also means when the trend breaks down, you will have given back some of your unrealised profits before you close out.

Rather, than use a limit, we will place a stop at the low of the last 20 time periods.

We never move this stop further away:

. but if the 20-hour low is higher than our previous stop.

. we raise our stop to the 20-hour low.

Very broadly, this means our stop is trailing the trend.

The chart below shows that we would get stopped out using this strategy, when the price dips sharply at 16.00 on 15 July.

The 20-hour low that defined our stop, would at this point have been 1.1097.

We bought in at 1.1082 and are stopped out at 1.1097.

We make a profit of 15 pips.

This is less than we made with the first strategy, but aiming to run your profits in this way can yield high profits when a trend persists.

These occasions tend to be infrequent.

Want to know the good news?

In the long run:

. the profits should outweigh the losses incurred from those times when the trend breaks down.

Using a Forex counter-trending swing trading strategy.

Our third swing trading strategy is more a countrending trade and therefore does the opposite of the first two.

We use the same principles of trying to spot relatively short-term trends building:

. but now try to profit from the frequency with which these trends tend to break down.

Remember that as noted earlier:

increasing highs suggest an uptrend, and decreasing lows suggest a downtrend.

We also saw how an early part of a trend can be followed by a period of retracement, before the trend resumes.

A counter-trend trader would try to catch the swing in this period of reversion.

To do so, we would try to recognise the uptrend pattern.

Then when a fresh high was followed by a sequence of failures to break new highs - we go short in anticipation of such a reversion.

When counter-trending, it is very important to maintain strong discipline if the price moves against you.

If the market resumes its trend against you, you must be ready to admit you are wrong and draw a line under the trade.

All our strategies so far, are very simple.

They count on our ability to recognise and understand price action.

What can we do to improve our strategies?

Well, there are several things we can try.

The first is to try to match our trade, with the long-term trend.

Although we were looking at an hourly chart, it can help to also look at a longer term chart - to get a feel for the long-term trend.

Try and trade only when your direction matches what you see as the long-term trend.

Another way to improve your strategy, is to use a secondary technical indicator to confirm your thinking.

. if you are a counter-trender and thinking of selling…

. check the RSI and see if it signals the market as overbought.

A moving average (MA) is another indicator you could use to help.

An MA smooths out prices to give a clearer view of the trend.

And because an MA incorporates older price data, it's an easy way to compare how the current price compares to older prices.

Using an additional MA indicator.

The chart above shows the:

25-hour MA as a red dotted line 100-hour MA as a green dotted line.

This is overlaid on the EUR/USD chart that we looked at earlier.

We can see that the quicker red MA line is above the slower green MA line, when we took our long position in the first two strategies.

A shorter MA being above a longer MA, is usually seen as a confirmation of an uptrend.

An MA is just one of the many powerful but simple-to-use indicators, available with MetaTrader 4 Supreme Edition.

Last words on Forex swing trading strategies.

We've looked at some entry and exit strategies for swing trading.

But it's important to note that a complete swing trading system, will also incorporate good money management and identify suitable markets.

Some other good practices are to:

avoid trading against the overall trend of the market use a secondary indicator to confirm a signal from your primary indicator have a clear idea of your exit threshold and keep it less than the profit you are targeting try out your strategies in a risk-free environment like our Demo Trading Account, before you start trading with them live.

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A Simple Momentum Swing Trading Strategy.

What is Swing Trading?

Swing trading is a strategy that requires close attention to both charts and fundamental news flows. It is popular with those who like a “hands on approach”. It works by trading on the recurring movements or swings that happen in currency markets.

Swing trading doesn’t have to use a particular timeframe, even though some people define it as a trading system that holds position for less than one week. Swings happen at all timeframes so it is more logical to define it as a system that enters and exits the market during any kind of price waves.

Swing Trading Into the Trend.

Most swing strategies trade in the direction of the prevailing trend. With this strategy the trader aims to enter long on rising momentum and enter short on falling momentum. They aim to time their entries to coincide with the natural market rhythm thereby buying into troughs and selling into peaks.

With a strict momentum based trading system, the swing trader will only trade in the direction of the main trend. They would not hold a short position against an upward trend. Similarly, they would not go long in a prevailing downward trend.

Many swing traders say this is more logical because there is less chance of being “wrong sided” when a short-term trend changes direction.

Swing Trading Against the Trend.

Many compare swing trading against the trend to picking pennies off a busy highway. Because it involves moving against the tide of the market, this approach runs a higher risk of failure.

The aim of the trading style is to work on the upswings that take place counter-to the main trend. That is, in an uptrend, the swing trader will enter the market as the price drops through a short-term correction. In a downtrend, the strategy will enter long into the short-term upswings.

Why use this method when it seems prone to failure? The attraction for those using this technique is that corrective swings against the main trend can be more powerful and rapid than swings into the trend.

There is also the bonus of potentially catching an explosive breakout that takes place when the main trend changes course. In these events, the price can move percentage points within a short space of time. In reality, many reverse swing traders miss-out on these moves because they close positions as soon as there’s a modest profit.

Momentum Swing Trading.

With swing trading, good timing is essential to profitability. With each swing, the amount of profit captured is relatively small. A trader will usually target at least 20 pips on each swing. With lower amounts, the spread and fees will absorb a high percentage of the profits.

This makes swing trading a system that relies on skillful use of charting tools, combined with a sound fundamental viewpoint.

The trading rules for momentum swing trading.

Several technical indicators are helpful for swing trading. However, the most basic – preferred by many – are a combination of moving average lines and support/resistance levels.

To use this system you will need to plot three moving averages on the chart.

Because three moving averages are used, traders sometimes call this a Triple SMA system (triple simple moving average) or a just crossover system. Some traders use other averages such as the exponential or the weighted. In my experience, simple moving averages will work just as well as the more complex ones.

It works as follows:

Enter long side only when the price is above the main trend line . Generally, this is the 200 period moving average. This indicates strong upward momentum. Enter the short side only when the price drops below the trend line. This indicates strong downward momentum.

The entries as signaled by crossover of the fast and slow line. With momentum swings, the system trades in the general direction of the trend.

This makes certain that when a trend is rising the strategy is long, and when falling it is short.

A value based swing strategy does the opposite to the above. That is, it buys when the price is below the trend line and sells when above. The belief is that the price will revert to the mean over time.

That is when above the main trend line it must be overvalued and the price should fall. Conversely, when the price is below the trend line the currency pair is undervalued and should rise back towards the mean.

Figure 1 shows the momentum strategy in action. Here there are three moving average lines shown on the chart.

Trend line – the 200 period simple moving average (black) Fast line – The 8 period moving average (orange) Slow line – The 25 period moving average (green)

The price should be above the main trend line A buy order is placed when the fast line crosses upwards through (or close to) the slow line.

The fast line crosses downwards through (or close to) the slow line Alternative, when the trade passes a certain profit target – for example 30 pips.

Some traders also wait for a confirmation that the closing of the next bar does in fact re-establish the crossover.

Figure 2 below shows the same action, in reverse. That is trading a downward trend.

The price should be below the main trend line. A sell order is placed when the fast line falls downwards below the slow line.

The fast line crosses back upwards through the slow line. Alternatively, close occurs after the position reaches a set profit target.

Don’t Forget Support/Resistances.

One thing to keep in mind when using chart strategies like this is the price action itself. The more complex indicators can sometimes detract from the basics of examining price movements, support and resistance levels or in analyzing other related markets.

Using basic support and resistance lines will greatly improve your success rate. This will help you to determine where price levels are likely to “stick” and encounter an impasse. This can be useful in deciding where to placing stops or even when to avoid the trade altogether.

Dealing with False Signals.

As with any technical strategy, swing traders have to learn to deal with false signals. Moving averages like other chart indicators tend to create a lot of noise and this will generate false entry and exit points from time to time. A failure rate of around 20-30% is the norm.

False positives happen when the signal indicates an entry but it fails to produce a profitable outcome. False negatives happen when the signal fails to indicate an entry that would have produced a profitable trade.

Figure 3 below shows some typical examples of false signals.

The first area shows a set of “noisy” false buy signals. The fast line moves up through the slow line but the price immediately reverses and pulls back towards the trend. On falling back, the price rises again and creates a second false signal. Staying out of the trade when the price is moving closely down to (or up towards) the trend line is one way to avoid this.

The second example shows two potentially ambiguous sell signals. The fast line moves above the slow briefly and then falls to create a false signal. The price however changes direction and moves higher, back above the trend line. Again, avoiding entries when the price is close to the trend line can overcome these kinds of false starts.

Trend Reversals.

While some swing traders use purely technical systems, the more successful ones are those who use a fundamental overlay.

One of the skills a swing trader needs to learn is when and if the sentiment or fundamentals have changed. Trend reversals normally do not happen without good reason. Major trends turn either:

When the economic fundamentals affecting the currencies have changed (or those of related currencies) When the price has overshot fair value and enters a corrective phase.

Also, don’t suppose that the market will turn immediately on a new piece of economic data. Sometimes it can take time to assimilate and for the trend to reverse. These present good opportunities.

Profitable swing traders use economic fundamentals as the backstop to their strategy and this helps them anticipate trend behaviors.

For example, an upside breakout is far more likely when the central bank has increased its growth forecasts, or when its interest rate policy is revised upwards. Similarly, a downside break is more likely after a downbeat economic forecast.

Swing Trading Versus Buy and Hold.

If you’ve scanned around the Internet, you’ll probably see that there have been extensive studies comparing the performance of swing traders with buy and hold traders. All of the reputable ones that I’ve seen show that over the long haul very few swing traders (or any kind of in/out traders) are able to outperform a simple buy and hold system.

They do however point to the fact that a small minority of traders are able to buck the trend and turn a profit over the year even after adding in trading fees. Whether these are just outliers, who’ll return to below average returns over time is not known.

Buy and hold traders claim that the most profitable way to capitalize on any trend is to simply enter early and hold your position until the trend slows or reverses. Less trade volume also avoids mounting trading costs.

The risk to the swing trader is that by dipping in and out of the market they can miss the big moves.

Which system you choose is a matter of choice.

Want to stay up to date?

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Trends are all about timing. Time them right you can potentially capture a strong move in the market. Day Trading Volume Breakouts.

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This momentum strategy is very straightforward. All you need is the Bollinger bands indicator and to.

Thanks this a useful technique. What is the way to overcome the 20/30% false entry signal you mention above?

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Strategies.

Matthew Holtz is a financial market analyst. Before becoming freelance, he worked in London’s financial district for 3 years in foreign exchange research. He lives in North London with his wife and children.

Forex Swing Trading Strategies.

If you are searching for a suitable Forex swing trading strategies to use to trade the currency market or if you are trying to develop your own Forex trading strategy but need some more ideas on how to improve it, then welcome!

There are lots of free Forex swing trading strategies that you can use and try to incorporate the ideas into your own trading system you may be developing.

Swing Trading is about buying at bottom and selling at the top and if you miss the start of the trend, you can also have a chance to get in along the way. All you need to do is wait and identify price swing points, which are essentially resistance and support levels on your price chart and then get in.

I hope that you will find one or two Forex swing trading strategies here that would help you in trading the forex market.

Remember that these swing trading systems can also be used to trade other financial markets as well, like the stock market, the commodies or the futures markets. The underlying trading principles are the same.

To make it easy for readers and visitors of this website, they are arranged in these four categories:

Basic Swing Trading Strategies.

Very basic Forex swing trading strategies, good for new traders to try and test to increase their understanding and knowledge:

Simple Swing Trading Strategies.

These are very simple Forex swing trading strategies, easy to try and simple to use.

Complex Swing Trading Strategies.

These Forex swing trading strategies involve a lot of Forex indicators, have many rules and or conditions for entering a trade and it would take time to get used to.

Advanced Swing Trading Strategies.

These are solid Forex swing trading strategies that have a very sound theory and logic, use very few indicators and are often used by advanced professional Forex swing traders.

Find A Forex Swing Trading Strategy That Fits You.

Every Forex trader is different simply because each trader has a unique trading personality. This trading personality may include the following:

trading habits, whether you are active or more picky on your trades. your profit goals what kind of risk that you can take or tolerate and your risk comfort level.

So if a swing trading system that works for me may not work for another Forex trader because we are all very different.

Read, learn, understand and try these Forex swing trading strategies and maybe this could result in you finding a trading system that fits you or you may find some swing trading techniques and ideas in here that you can incorporate into your own swing trading system to make it an effective trading system.

Ultimately, the goal of searching and then finding and then using any Forex trading strategy is all about making money.

And which ever Forex swing trading strategies or strategy that works for you and is making your money, that is the one that you should be using to your advantage effectively.