Developing a Swing Strategy in the Forex Market

Like any other investment market, the Forex market lends itself to a number of different trading strategies – day trading, scalping, long-term trading, etc. Which strategy chosen is really up to the individual trader and style of investment – the quick, fast trades; the longer, open positions; or somewhere in between. If you like compromise, you might opt for the “somewhere in between” model, or swing trading.

How Does Swing Trading Work?

Think of swing trading like a big swing that rotates or moves back and forth between two positions. Positions are held longer than a few minutes or an hour, like in day trading (scalping is the extreme version where trades are made every few seconds), but shorter than the weeks or months that’s common in long-term trading.

So how do you know when to make that perfect trade – not too early or not too late? You may not know that optimum time, but you can estimate as best as possible based on these tips:

1. Use fundamental analysis – This technique utilizes macroeconomic data to make trade decisions. It monitors economic changes based on such factors as changing political climates, Federal Reserve meetings, the housing market, or even disruptive weather changes. Staying current with international news is vital in this type of trading analysis.

2. Don’t forget about technical analysis – Fundamental analysis is important, but don’t negate the significance of technical analysis. With this type of analysis, investors closely monitor currency rate fluctuations through the use of charts, past and present currency quotes, and other market data, and then base their decision on overall movements or trends in the market. One of the more common technical analysis tools to measure such trends is Elliot Wave analysis. It postulates that market trends come and go in waves, due to basic human nature.

3. Know your limits – Determine how much risk you are willing to take. If a currency starts to fall in only a few hours, are you willing to hold out a day or so before you sell and take that gamble that the “sell price” will go up? Perhaps you’re more interested in minimizing any potential losses? Only you can make that decision based upon your overall risk strategies. A good rule of thumb, however, is to enter a trade only when the risk can bring a reward of at least 3:1.

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