Swing trading in Forex is a term for a strategy that entails holding on to your position for a medium amount of time, meaning up to several days. Typical swing trades last anywhere from a couple of days to a week or two. It is different from short term or long term trading and is most suitable for people who have full time jobs or are students but do have some time to dedicate to watching the Forex market daily. Larger stop losses are necessary for swing trading than for day trading, which is important to factor into your trading strategy and money management.
During the time that swing traders hold their positions, they are likely to see several fluctuations in price of any particular currency and the idea behind swing trading is to hold on to the position through these fluctuations until you see that you are going to have significant profits. If these fluctuations will cause intense stress or pressure to make trades quickly, then swing trading is not for you. If you are a person who needs to know what the result will be very early in the transaction, then swing trading is not a good choice for you. Swing trading works best for people who are patient and have other things to focus on than their Forex accounts. Swing traders need to be able to handle large stop losses, fewer trades and slower progress.
The idea behind swing trading is that the Forex market swings back and forth and you are looking for the highs or lows of each swing. A swing trader will look for the swing lows to enter the trade and the swing highs to exit the trade. The most important part of swing trading is to be able to read the charts and predict the swings. When you anticipate the next swing, you know whether to enter or exit the market.
There is a lot of daily movement in the 5 minute charts. The larger entities in the market like banks and industry count on smaller traders to get involved in the momentary movements. Then they can profit from the larger swings but you can avoid that trap by employing swing trading strategies.
Choosing the right pair and the right time for swing trading requires a few basic ingredients. You need high volatility, close spreads and good liquidity in order for swing trading to work. A trader needs to understand the simple technical indicators and know how to use them in his favor. Indicators like the Relative Strength Index, the Stochastic and the Bollinger Band will help a swing trader make intelligent trading decisions.
Making sure you understand and use the correct tools is essential to successful swing trading. As always, make sure you back test and demo trade any Forex trading strategy before risking real funds. Understand and research the different approaches to swing trading before you adopt it as your own trading strategy.