Swing Strategies for Forex Trading - Key Takeaways
- The Swing trading strategy for Forex might be a more convenient and less stressful option for those traders with full-time jobs and other important commitments. Unlike in day trading, this style involves trades with a timeframe ranging from several days to a number of weeks.
- For many traders, especially for the beginners, Heiken Ashi charts are much simpler and easier for the purpose of trend detection. Consequently, those types of analysis can be easily combined with swing trading strategies for Forex.
- In the short to medium term currencies that are controlled by more dovish policy-oriented central banks typically tend to depreciate against the ones controlled by more hawkish institutions. Therefore, traders can analyze the latest announcements and make predictions based on how the monetary authorities respond to the latest economic developments.
FAQ: Forex Swing Trading Strategies
What are some of the advantages and disadvantages of swing strategy to trade Forex?
There are several benefits to Forex trading with swing strategies. Unlike day trading, this method is quite compatible with any other regular full-time job, also a trader does not have to be in front of the screen for the whole day, has much fewer expenses on spreads and finally for most market participants, it is a less stressful option as well.
However, the Swing trading style does have some disadvantages as well. Since the trading time frame can range from a few days to several weeks, the trader is exposed to overnight market risks. Also, an individual has to cover the rollover costs to the broker for holding trades open overnight. There are some specific positions for which a trader can get an interest payment from a broker. However, with today’s near-zero rate policies across the world, there are not that many options for this.
The rollover charge by brokers might represent a small fee, however, over the time those costs can add up and eventually could take up a significant portion of the potential payout.
Finally, in the process of trying to lock in short term gains, traders using a swing trading style might miss the long term moves and opportunities for earning even higher payouts.
How does the swing trading strategy for FX traders differ from scalping and long term trading methods?
The Scalping trading style differs from the swing strategy in two respects. Firstly, it usually involves trades with 1 to 15-minute timeframes. Also, traders using this method typically do not use stop-loss orders and prefer to open and close traders manually.
As for the differences with long term trading, there are essentially two differences. Firstly, this style of trading involves larger timeframes, which might range from several months to a number of quarters as well.
Also, it is worth noting that, that the Fundamental analysis plays a central role in any thorough long term analysis, factors such as relative real interest rates, the Purchasing Power Parity, and other economic indicators can have a major influence on the exchange rates. This might not always be the case with swing trades since they have a much shorter time frame.
What are some of the most common mistakes for those traders who use swing strategies to trade Forex?
Clearly the very common mistake of using very high leverage is not strictly confined to the one trading style. However, here it might be helpful to keep in mind that, since the swing trading involves keeping positions open for up to several weeks, this can be even more dangerous.
With this duration, currency pairs might move by 5, 10, or even in some cases by 20%. On the other hand, even with 50:1 leverage, it might only take a 2% change for the position to be wiped out. So this might be something helpful to keep in mind.
Also, many traders make a mistake of only using one technical indicator to analyze the charts and make decisions, while ignoring other tools. This can be very misleading and can easily lead to wrong conclusions and by extension to significant losses.
Finally, some swing traders do not have a commitment to devote regular hours to Forex trading. With this style, it does not have to be an entire day, for some market participants even an hour per day might be enough, however, it is consistency which matters the most. So if a trader ignores this and only opens a trading platform occasionally, from time to time, then he or she can miss significant market moves, which can lead to missed opportunities and severe losses.
In the Forex swing trading strategy, are some currency pairs potentially more profitable than others?
Generally speaking, the Forex swing trading strategy can be profitable with any currency pair. However, it might be useful to mention, that the currency pairs with higher average volatility are more likely to provide trader opportunities for earning a decent payout, than the other ones.
For example, a market participant might have a harder time making serious gains with EUR/CHF, which on average, according to the investing.com calculator, moves only by 53 pips per day, compared to GBP/NZD, which has an average 205 pip fluctuation per day.
Some other highly volatile currency pairs include EUR/NZD, EUR/AUD, EUR/CAD, GBP/AUD, GBP/CAD, and GBP/JPY.
Do the dovish policies of the central bank always lead to currency depreciation?
In the short to medium term, everything else being equal, such policies as cutting interest rates significantly and starting Quantitative Easing does very often lead to currency depreciation. One obvious example of this would be Euro, which has fallen considerably since 2014 after the European Central Bank made similar decisions.
However, this might not always be the case, especially, if the other major central banks are following the same policies. Quite recently, the US Federal Reserve cut rates back to 0 to 0.25% range, however, USD did not suffer much of a depreciation. One of the reasons for this could be that other central banks, like Bank of England, ECB, The Reserve Bank of Australia, and many others followed the same path.
The outcome of those policies can also be materially different in the long term. Central banks might implement easing policies, weakening their currency in the short term, but after some time the latter might bounce back and even appreciate because of the Purchasing Power Parity or other factors.
One example of this could be the Swiss Franc and Japanese Yen. Their central banks followed the policy of near-zero rates for decades. In fact, both of them have negative yields, JPY has -0.1% and CHF -0.75%. Logically, those measures should have weakened those two currencies tremendously.
Instead, we see that quite often they hold ground against their peers quite well. In fact, one can argue that both of those currencies are engaged in the long term an uptrend against the US dollar, Euro, Pound, and some other ones as well.