A trading strategy for forex using the principles of swing trading is both very popular and relatively simple. It can be used with any time frame, and lends itself to short term trading. Taking off many smaller bites is often more profitable in the long run than fewer larger and more risky chunks. The advantage of using this type of approach is that the technical analysis requirement is not very onerous, and the key principles can be picked up quite easily.
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Three steps to Forex swing trading:
1. Trend analysis
Establish the direction of a trend, either up or down, for your chosen currency pair. One useful way is to apply the 10ma and 30ema lines to the chart, for whichever period you are charting (eg. the 5 minute, one hour or four hour chart). Use an indicator such as the ADX to establish the strength of the trend, and if it is reasonably strong, look for support or resistance points.
2. Entry point
Look for an entry point using normal candlestick patterns. Alternatively, watch the price oscillations as they move between the two moving average lines. You may want to set up an order for when the price retreats from its trend. Make sure that you buy cheap! In a downtrend, sell the pair, which is the same as shorting a stock or buying a put. You will then buy it back for a profit. In an uptrend, buy the pair and sell for a profit.
3. Set a stop loss and profit target
Always set a stop loss before you set a profit target. It is really important to make sure that your capital is protected. After that, set a profit target based on your favourite method: Fibonnaci lines, or a particular percentage, or even a swing back up onto the trend line. Whatever it is, be willing to take your profit and exit the trade – don’t get greedy and try and ride the trade. It is always better to lock in your profit and set up the next trade, if the trend is holding.
In forex, trend reversals can happen very quickly, and trades can be executed extremely quickly. Under the right circumstances, profits can be taken within a couple of minutes. With such an exciting trading environment such as found with forex, make sure that you investigate swing-trading-options , and have developed a solid trading plan.
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