Swing Trading Forex
Last updated on May 5th, 2015
Watch us show you a EURUSD Forex Swing Trade unfold here along with tips and advice:
There are many ways to trade forex but swing trading is by far my favorite style of forex trading. Forex markets offer many opportunities to profit in the market but it is also fraught with pitfalls and hazards. Spread costs can whittle away at your trade capital, brokers are notorious and are not your friends. They can manipulate the price and the spreads at their whim, always to their advantage and never to yours.
Yet despite that, forex prices move and we can get take advantage of that price movement to make big profits. Of course, along with the potential for big profits comes the greater, less attractive prospect of great losses. Risk is something that is often overlooked, but it always makes its presence known, reminding us that trading is difficult and the additional challenges presented to us by forex brokers and trade costs needs to be accounted for with all our trade decisions.
The best way to mitigate the additional challenges presented by the brokers is to swing trade. Effective swing trading strategies take larger trades, with bigger profit targets and stop levels. By making larger trades, spread costs become less important because they represent a tiny fractional percentage of our overall profit potential. Compare a 3 pip spread to a daytrade that might only average 10 pips. The spread represents 30% of your potential.
You are already losing the second you place the trade. Contrast that to a 200 pip swing trade. The 3 pips of spread become rather insignificant. Brokers need to make a living and do offer a valuable service. I just prefer that they don’t do it at my expense and harm to my trade account. Besides, while offsetting the broker challenge and spread cost, swing trading forex also gives us many other attractive benefits that are unique to trading.
Forex trades practically around the clock
Daytrading or short term trading forex often equates to being married to your charts. The markets move when they move and daytrading requires a large time commitment. This is a tremendous challenge, as well. While it chews up one’s time, it also causes mistakes that are due to just regular everyday life happenings; availability, distractions, fatigue, lack of discipline, lack of consistent commitment, etc.. Trading is hard enough, right?
There’s someone on the other side of your trade who wants to win! Having to deal with all the additional ‘life’ challenges only makes success that much more difficult to attain. The good news is that with swing trading, we can mitigate those challenges as well.
My very favorite timeframe to trade forex is end of day (daily) charts. Each bar represents a full day’s worth of price action. The best part of all, for me, is that I only have to check my charts at the end of each day. I spend about 15 minutes per day on average managing my trades; placing trades, cancelling trade setups that are no longer valid, and moving stops on active trades per the rules of my tradeplan. I will also check my charts in the morning when I am daytrading (futures, not forex) because my style of trading often leads to quick explosive moves and if a trade moves quickly to a target level, intraday, I will move my stops to protect the position. This also only takes a few minutes, though. If you think about all the time challenges that exist in trading forex, you can see why this style of trading, swing trading with daily charts, can be so attractive. You get to completely neutralize the worst part of the time component while also ‘winning’ a large portion of your life back. Isn’t that what it is all about?
There are other compelling reasons to swing trade forex. Most of the best tradable forex pairs, and there are many, are going to go on large trending moves a few times per year. We can capture these very large moves with minimal effort and that’s what I like!
There are other timeframes that one can use to swing trade forex. The 4 hour chart is one that attracts a lot of interest. You can get more trades and more activity with this type of chart. I believe though, that most traders really don’t think it through completely when they decide to trade this timeframe, or 2 hour charts, hourly charts, etc.. For example: Imagine if you are waiting for a trade to set up. Four hours pass and the setup hasn’t yet happened.
Another four hours. Another! Maybe it sets up in the middle of the night.
Maybe after waiting for so many hours for the setup to occur, it actually cancels and the possibility of another setup in the opposite direction happens. How long can you actually pay attention to your chart so that you don’t miss your trade setup? Let’s say it does trigger in. Now what? Every four hours you have to be vigilant to manage your trade. It could last for days, or not. Now multiply that scenario by a series of trades, over and over again.
Can you do that? Can you trade like that on a consistent, disciplined basis over time? Imagine yourself doing this for 3 months straight. How about 6 months from now? Three years down the road can you stay with your tradeplan?
Most traders cannot do this and so they revert to trying to daytrade which does not solve the problem and in fact creates all the other problems mentioned above. The end result is a trader who makes mistakes, chases every new ‘best’ thing and never really embarks upon an approach with any real chance of succeeding.
If you really think it through, it becomes apparent that the daily chart is a very attractive chart to trade forex. One question that inexperienced traders always ask is, ‘What about the risk? Daily charts lead to larger positions which require bigger stop losses and thus larger risk levels.’
This is a big misnomer and actually leads to the important issue of risk management. It also suggests that one has to be very careful in selecting a broker. If you want to trade the daily charts, you have to be able to trade micro lot positions and you need a broker who allows that. Another big misnomer is how people think that you can’t make money with micro lots. Who wants to even bother with .10 per pip? That’s the wrong way to think.
Brokers offer 50 to 1 leverage or more. Just because the broker offers that though, doesn’t mean a trader should take advantage of it. They should not! Unless they are just gambling and trying to get rich quick, in which case they’d probably do better in Vegas.
Trading forex should be treated as a serious business and each trade should be considered just a single business transaction with precisely calculated risk. With the use of micros, one could ‘tune’ their position size to the exact level that is safe for their account.
For example: Let’s say we have a $30,000 trade account. With daily swing trades, one should only risk from .75% to 2% of their account on any give trade. If a swing trade has a 100 pip risk, from entry to stop, then I can only afford to put on a trade with $300 risk, 1%, or three mini size lots at $1 per pip. What if I have a $31,000 account? Then I would want to risk $310 and I would need the ability to trade micro lots to keep my risk parameter at 1%. I would put on a 3.1 mini lots trade, 3 minis and 1 micro lot, in other words. Like this, I can always tune my position size to the proper risk level that my trade plan calls for.
How I Execute Forex Swing Trades
With my personal style of trading, I only risk from .75 to 1%. That’s because I will often scale in as the trade progresses and I could literally put on several positions to take advantage of the big trending moves I spoke of earlier. If I have three distinct long trades, each with 1%, then in essence I have 3% risk on that pair.
But if I put on 2% risk on each, then I could find myself with 6% risk, which is too much. A few losses in a row will lead to very harmful drawdowns in my account. A few losses in a row is common in trading, any timeframe, any strategy and can come at any time.
We have to protect against that with small risk.
I also scale out a various target levels. Again, the use of micro lots plays an important role.
If I have a 3 mini lot trade working, and I want to scale out ¼ of my position at 3 different targets while trailing the final part of the position, then I need to be able to trade micro lots. I would take off .7 (7 micros), .8, .8 and then trail .7, for example. The combination of all those micro lots equals 3 mini lots. This gives me great flexibility in keeping my risk to the appropriate level while also allowing me to scale in and scale out, as per the rules of my tradeplan.
One mini lot is 10 micro lots and the use of micros, minis and even full size lots once an account grows to the proper level becomes an important tool for growing one’s trade account in a safe, business-like way.
Even the very best trade strategies will take losses and experience drawdown. If you want to succeed at trading forex, you can never lose sight of this reality to trading. Losses tend to cluster up, too. If you put on too much risk, you will blow up your account even with the best strategy.
It is important that you think like a business person and take the risk aspects to trading very seriously. What good is a great strategy that will produce thousands of pips of profit this year IF you bust yourself out on some inevitable losing trades? By keeping the risk small, you will live to fight another day, and will be able to take the next trade that the tradeplan calls for. Then, when the winners come pouring in, your account will grow and so will the size of your position while still maintaining the safety of the .75 to 2% rule, depending on your tradeplan approach.
The strategy I use is a momentum strategy that takes advantage of shifts in momentum, utilizing a combination of breakout, break away, continuation and price reversal setups. My strategy always gives me a favorable risk reward ratio, where my designated targets will make more than the amount I’m risking.
Like this, I am able to quickly overcome losing trades and keep the account growing on a steady basis. The targets themselves are dynamically tuned to market conditions and in fact, the entire trade profile is tuned to the current condition of the market and is based on pure price action.
Combining my method of trading, with the smart money management approach I just explained above, I can be assured that my account will grow. Moreover, I only need to invest about 15 minutes of time with the markets, on average, each and every day. This is a very realistic approach which respects the risks of the market, but also acknowledges the very practical fact that life occurs and can be devastating to one’s trade business. It must be mitigated just like the broker risk.
Four hour charts, one hour charts, daytrading forex, might work for a while. Yet I believe that for most people, they are unrealistic timeframes that have not been well thought through. It requires being able to do it, day in and day out. Most people can’t. Life happens.
The good news is that with daily charts, you can balance the practicalities and needs of everyday life with the needs of your trading. You also get to remove the most harmful aspect to your trading – yourself! With the daily charts, you set your trades turn your attention to other things. Or, like I prefer to remind myself, ‘15 minutes per day, then walk-away!’
For more information on my style of trading, please visit www.PremierTraderUniversity.com.
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