Swing Trading the Forex Market

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The Forex market is custom made for swing trading. Swing trading is my favorite and most effective method of Forex trading. Swing trading has all the advantageous of both day trading and trend trading without the inherent flaws of both methods.

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Day trading is a great risk management tool, as you never hold a position over night; however, this fact also severely limits your profits. Trend trading allows you to capture long term moves, but often suffers severe drawdowns while you wait for the anticipated trend to continue. Swing trading is the perfect compromise between the two trading methods. Its goal is to locate short term trends, ride them without regard to timeframe, and quickly exit when the move ends.

The 24-hour nature of the Forex market makes it a perfect match for swing trading. Different traders have different definitions for Swing Trading. There is no right or wrong here, but for the purposes of this article, I define Forex Swing trading as any trade held over a day, but less than 2 weeks.

The tools I use for swing trading are 15-minute, 60-minute and daily candlestick charts. I keep the charts relatively clean of indicators except for Bollinger Bands and a 20-period SMA. One can swing trade technically, fundamentally or use a combination of both. This article will explain and give an example of each of the 3 swing trading methods. Let’s start out with Technical:

Technical swing trading method— This is perhaps the most well known method to today’s Forex swing trader. All the major retail dealers have extensive education on Technical Analysis and often offer a nice suite of TA tools.  I like using 20-period SMA crossovers on 60 minutes candlestick charts as my technical entry method of choice. It’s a very simple yet effective method to catch nice swings in the market. I wait for a change in short term trend to begin as evidenced by the 20-period SMA. Then I wait for one full hour candle to develop under or over the SMA in the direction of the apparent trend change, this is the entry signal. I buy at market, after the hour candle forms under or over the 20-period SMA confirming a change in my opinion. The idea is to ride the move until another hour candle closes above or below the SMA in the opposite direction.

Fundamental swing trading method— The Forex market is driven by fundamentals such as economic announcements/number releases, central bank meetings, intervention, and a host of other events. The most popular event is the NFP or Non Farm Payroll report for the EUR/USD. This announcement occurs at 8:30 AM EST. on the first Friday of every month. The EUR/USD moves an average of 124 PIPS very quickly based on this information.

Most traders try to catch the move, and there is tons of gamesmanship taking place just prior by dealers and traders. It is very difficult to correctly call the move, and it moves so fast, that any mistake can be costly. I use this fundamental event as a way to enter a swing trade but not in the traditional way. I wait until the move is over, normally about 15 minutes, and then fade the move in the opposite direction. My experience has been that the market will slowly move back to its short term trend after the spike cause by the NFP report settles down. The NFP often creates a very good entry price for a several day swing trade. I love this set up and trade it often.

There are also a combination of fundamental and Technical tactics that are highly effective in the Forex market. I will touch upon them in future articles. This brief article described swing trading as an effective method of Forex trading and provided examples of a technical and fundamental swing trading method.

Good Luck!

David Goodboy is Vice President of Business Development for a New York City based multi-strategy fund. Read his blog at marketsurfer.com.

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