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How Swing Trading Works

When I entered the trading world, I started day trading Forex.  It was a great learning environment especially for learning to take losses.  Overall, I did alright day trading but the bulk of my success has been in swing trading.  More specifically, swing trading in the retail Forex market.

Cost Per Trade

The main reason I started investigating swing trading was the cost of doing business.  It made no sense to me to trade one standard lot for 20 pips at a cost of 2 pips for $20.00.   10% of a trade being the cost is not good business especially with the pressure that comes with day trading.

How swing trading works is quite simple:  Taking advantage of the swings that occur in the market usually in the direction of the main trend.

Swing Trading Chart

This chart shows with arrows all the swings that you would want to participate on during this down trend.  The X is where you would stand aside because those are counter trend moves to the overall down trend.  Some traders when swing trading will exit their short positions during the X phase of move and aim to jump back on board when the move resumes.  Day traders may take advantage of the counter moves but the astute swing trading professional will stand aside and look to re-engage the down side.

Can you see a drawback in swing trading?  Some will rightly point out that there is no way you can pick up the entire swing move with 100% probability.  That is true.  That is not the point of swing trading.

Picking up the meat of the move is truly how swing trading works.  Unless you can consistently pick tops and bottoms, the meat of the move is all you can get.  That is not a bad thing.  Price gets choppy generally during two phases of a move – the beginning and the end.  These are the point where many traders churn out their account to the point of excessive losses.

By grabbing the meat of the move in the trade, you are able to actually trade in a more relaxed state.  You know that when price starts to chop around, there is a good chance that price is about to correct in the opposite direction of your trade.  What do you do?  You exit and get paid for the work you have done getting into a good trade.

Forex Swing Trading Chart

Notice how price at the both the top and bottoms of the swings is sideways or otherwise choppy.  Would you be able to grab the exact turn of the move?  If you are honest, you would say no.  Can you see a way to enter once the move has started? Can you see how the swings that are in the direction of the overall move is the preferred way to take a trade?  If you can, you are picking up just how swing trading works.

Grab the meat of the move of the swing that’s
in the direction of the overall trend.

One thing I hope you notice with these charts is how clean the price action looks.  It is easy to see where the swings are and unlike day trading, these swings down are between 120-190 pips.  Taking the earlier example, you pay the same amount in spread but now the gross profit is $1200 at the bottom end.  The cost of doing business is 1.6% of the gross profit which to me is more acceptable.

There is a part of swing trading that some may not be comfortable with.  How swing trading works is that you don’t simply close out the position at the end of the day.  You carry these trades overnight and many times you will carry through the weekend. For some people, that may seem too risky because of the current conditions we find ourselves in economically.  At any time, adverse news could come that could put you in a vulnerable position that you are in.

The drawback comes if you swing trade Futures because the day trading margins are different than the overnight margin.  You must have more in the account to swing trade Futures and that is why I stick to the retail Forex market for my swing trading.

Swing Trading Entries

To get into swing trades, people will generally use pullbacks (corrections) or play the breakouts of the range which are marked off clearly in the second chart above.  Many traders will use technical indicators or simple support/resistance lines to find a zone of opportunity for trading.  You can find more specifics on swing trading entries at this article:  Swing Trading Entry Strategy

Learn By Doing

How swing trading works is best learned by doing.  While there is a learning curve involved, you can shorten it by taking advantage of a predesignated trading system.  For more information on swing trading systems, you can check out Premier Trader University or the very successful Keltner Bells.