One of the most lucrative forms of trading in forex can be swing trading. In fact, according to many successful traders, swing trades can be very profitable. The key to making good swing trades is a basic knowledge of market structure and knowing how to spot trading trends. While most traders think of swing trading as having very fast entry and exit points, the positions held longer sometimes turn over higher profits. So while swing trading is popular with traders who are too nervous to hold onto a position long-term, exiting too quickly can cut the chances for a higher reward. The key is to understand the phases and then according to a predetermined strategy, choose the entry and exit points. Don’t get carried away by the excitement of a very fast-paced market, but act according to your own set of rules.
- Build a strategy from the beginning. There are a number of successful techniques traders use for swing trades. They can range from cross overs, to pullbacks, to breakouts and market profiles. But no matter which technique is the most comfortable, it must be incorporated into a strategy. Build the strategy with rules and guidelines that are important for money management, trade management and exit strategies. This can be a strategy specific to swing trading inside of your FX trading plan.
- Understand the basic stages of swing trade markets. The first stage, referred to as the accumulation stage, is where the traders are getting ready to take positions. While watching the ebb and flow of the market, it is assumed that at some point the value will begin to rise. The second stage is where the value moves forward at a fast and steady rate. If not already in, there is still time to take a position. The third stage, or the distribution phase, is where traders begin to leave their positions and take profits before the wind-down begins. In the fourth stage, the prices are falling and the trader will have already taken an exit.
- Choose an entry point according to your swing trading strategy. To do this, you need to watch and determine which phase the market is in. Evaluating the stage is how you can decide when to enter. According to your strategy, you can enter during the first phase and enjoy the ride up during phase two. At anytime during this phase you could exit and take a profit. Or you could wait until the market has already reached some point in phase two and still enter successfully.
- Protect your investment all along the way. No matter when you enter, protect your investment from unexpected downturns. Build in protective stops from the beginning, according to your trading strategy.
- Take advantage of the 4-hour chart. This is the best chart to use for swing trading. Put your understanding of market structure into play here so you can determine the best trading opportunities. Set up indicators to use as triggers in your strategy that allow for trading with the trend.