Swing trading is a style of trading that capture gains in currency pairs over a period of time which span from a few days to several weeks. Swing trading is mainly based on technical analysis, because of the short-term nature of this style but the followers of this style, called “swing traders” are used to exploit fundamental analysis to corroborate technical analysis results. For example, if a swing trader eyes an upward trend in the EURUSD, he may want to assess whether the fundamentals of U.S. and Eurozone economies are indeed improving.
The goal of this style is to capture a chunk of a potential price move. The majority of swing traders trade on volatile currencies, those which have lots of movement, to assess where a currency pair is likely to move next, entering a order, and then capturing a chunk of the profit from that move.
Swing traders assess the profitability of trades on a risk/reward basis. By observing the chart of a currency pair they decide when to enter, where to place a stop loss, and when to exit. They observe daily charts, and 1-hour or 15-minute timeframes to find precise entry and stop loss points. Swing trading involves holding a (long/short) position for more than one trading session, but usually not longer than several weeks or a couple months.
Swing traders design a strategy that gives them an edge over many trades and observe trade setups that tend to lead to predictable movements in currency prices. There is not a single strategy to do that. Once a favorable risk/reward is chosen, being successful every time is not important. The more favorable the risk/reward of a trading strategy, the fewer times it needs to be successful to produce an overall profit over many trades.
There are three main advantages in trading with the swing style, compared to another famous trading style, the day trading. First, it requires less time. Second, it maximizes short-term gain potential by capturing the bulk of market swings. Third, swing traders can rely exclusively on technical analysis. There are also three main disadvantages. First, trade positions are subject to overnight and weekend market risk. Second, strong market u-turns can turn into big losses. Finally, swing traders often forget to pay attention to longer-term trends, being focused exclusively on short-term moves.
The distinction between swing and day trading is the holding time for positions. The former involves at least an overnight hold, whereas the latter exits the market before it closes. Day trading positions are limited to a single day. Swing trading involves holding for several days to weeks.
By holding a position overnight, traders must deal with the uncertainty of overnight risk such as gaps up or down against the position. By taking on the overnight risk, they are usually done with a smaller position size compared to day trading (assuming equal sized accounts). Day traders typically utilize larger position sizes and may use day trading margin of 25%.
Swing traders have usually access to margin or leverage of 50%. This means that he only needs to invest €10,000 for a trade with a current value of €20,000, for example. Swing traders usually work by observing multi-day chart patterns. The most common patterns exploited by swing traders are: moving average crossovers, cup-and-handle patterns, head and shoulders patterns, flags, and triangles. Key reversal candlesticks are often used in addition to other indicators to plan a solid trading strategy.