There are a variety of trading strategies in the forex market every day. While some strategies are better than others at achieving results, each has its advantages and disadvantages.

While separating the wheat from the chaff, swing trading has won strong support from forex traders. Some describe it as the basic form of forex trading, as positions are not only held overnight, but are often held for more than a day.

This is because most fundamental traders (or fundamentalists) are swing traders who make moves based on fundamentals that often take a few days or more to produce price movements sufficient to make a profit.

As swing trading becomes a more common strategy in the forex market, it is necessary to gain a deeper understanding of the implications of this practice. This is the basic strategy behind swing trading.

What is band trading?

For traders who buy and sell currencies using technical indicators that indicate upcoming price changes, swing trading is a short-term strategy. This trend can span any length of time, from a few days to a few weeks. Swing traders place great emphasis on technical analysis as a means of tracking currencies and determining when "volatility" is likely to occur. Large trading usually means that traders don't have to worry about the long-term value of a currency; They just want to profit from the peaks and troughs of momentum.

Look at the peak of the NZD/USD price from the low on September 2 to the high on September 6. Despite being stuck in a month-long decline, the currency pair's four days of rapid gains are exactly the kind of move that band traders are looking for:

You'll also notice a brief period of consolidation before a price break, which is a common indicator used by traders to predict volatility opportunities. In this case, it is not about the long-term value of the currency pair, but rather the possibility of experiencing rapid price movements in the near future.

Advantages of band trading

On the face of it, band trading takes a sound approach, but no one can avoid the fact that it is very risky. But with risk comes reward. Band trading has a number of key advantages that may make it superior to other popular trading methods.

Flexibility in trading hours

You need to use many trading methods for a long time - long trading hours, long positions and long-term commitments. Band trading takes a different approach and provides traders with great flexibility. Because you don't want to hold anything for a long time, but work from price fluctuations, you have considerable trading flexibility. Jumping between sessions seems feasible, and strictly speaking, day trading is another option. Regardless of your preference for trading hours, band trading is flexible enough.

Trade within clear boundaries

Although grey areas may appear in some trading strategies, it is recommended to trade within clear boundaries. Swing trading relies heavily on technical analysis, so you can establish more control. Trading strategies that emphasize long positions offer a lot of room on the border, but the ease of trading bands can make things easier to read.

Small stop loss

In swing trading, your stop loss is small, especially when weighed against long-term trades. For example, based on a typical four-hour chart, a stop loss for a swing trade might be 100 points, but for a stop loss based on a weekly chart and an overall position, you might be staring at 400 points.

With this in mind, swing trading allows you to select large positions rather than the low-leverage impact positions that are common in long-term trends.

Market entry and exit potential

Band trading gives you the freedom to enter and exit the market without fuss, so you can discover more trading opportunities. In almost any financial chart, you will see evidence of emerging patterns, but swing traders will be looking for support and resistance.

In the NZD/USD example mentioned above, once the currency pair reaches the resistance level, you can cash out your profits. And, if you think the currency will resume its downtrend, you might even consider shorting the pair to profit on both sides of the price action.

This is a popular strategy for traders who use highly volatile currency pairs. USD/SEK is one such pair, with plenty of peaks and spikes over time, as its three-month chart shows:

The USD/SEK is often considered the more "exotic" currency pair due to its high volatility and consequent high risk trading, making it a prime area for swing traders to try to profit from sharp price movements.

By getting in and out of the market at the right time, you can sweep up quick profits and set up other trades in the process. Few other trading strategies allow you to jump in and out of the market like swing trading.

Markets flow naturally and move more easily

The forex market fluctuates naturally, unnatural as it may seem. There is no permanent upward or downward trend.

For example, AUD/JPY pairings are known to reflect global investor sentiment. When global investment markets are strong, this pairing tends to add value. By contrast, the pair's corresponding price movements reflect depressed investment sentiment. By combining this knowledge with other technical indicators, you can use currency pairs such as AUD/JPY to take advantage of these ups and downs regardless of how the market moves.

At its best, swing trading can profit from price increases during bull markets and price declines during bear markets. Band trading does not lock you into any particular market, so you can move as the forex market emerges.

Risk of swing trading

Although profits can be found in closing trades, there are risks associated with this approach. The biggest risk comes during the weekend when the foreign exchange markets are closed. Market changes can cause a price gap and open at a much different price than the closing price, which puts swing traders in a position where even a stop loss will not save them from a large net loss.

Swing trading also leaves traders vulnerable to adverse market swings, especially given the way swing trades are designed to take advantage of retracements and other short-term price movements, many of which can trend larger. While volatility generally provides the potential for profit for experienced traders, it can increase the risk posed by swing trading.

As a result, traders may miss out on the profits that can be made simply by focusing on long-term trends rather than volatility opportunities.

The best indicator used in band trading

The success of swing trading largely depends on the metrics you use to identify swing potential. Here are some of the most popular indicators used by swing traders:

Moving average

Although they are best used in conjunction with other indicators, moving averages (especially long-term ones) can help you identify trend reversals that indicate opportunities for volatility, and can help you understand the overall strength of that trend.

For example, when a short-term moving average crosses a long-term moving average, this can be a major signal of the kind of trend reversal that swing traders are looking for. In the NZD/USD chart below, notice how the 50-day moving average (green) crossed over the 200-day moving average (red), resulting in a sharp drop in price that swing traders may be eager to take advantage of:

RSI

The Relative Strength Index (RSI) is an excellent tool to identify potential volatility trading opportunities based on bearish or bullish Settings, especially for traders looking for opportunities in a short time frame.

An RSI above 70 indicates overbought conditions that could lead to lower prices. However, if the RSI is below 30, it may indicate that the currency pair may experience underbuying conditions that increase in value.

The CHF/USD chart below illustrates both types of volatility: an oversold condition at work leading to an increase in price, followed by an excessive correction with an overbought condition, followed by a rapid decline in price:

Swing traders may open positions on both sides of price movements, thereby profiting from price increases and declines within hours.

Support line and resistance line

If you use Fibonacci or other trading theories, support and resistance lines can help you identify volatility opportunities based on your expectations for a pullback or extension.

For example, if you are watching USD/JPY trade within a certain range and the price is close to the resistance line, you may be eager to open a position in the expectation that the price will reverse and move toward the relevant resistance line. You can set your stop loss above the support line in case you are wrong, but this simple method enables first-time traders to make even profitable swing trades.

A long-term view suits some traders, but others want to generate more trading opportunities every day. Swing trading does this by monitoring market movements rather than just sitting back and waiting for things to work out for you.

Overall, swing trading increases control, trading activity, and most importantly, profit potential, drawing widespread praise among traders.