Forex trading styles can be divided into categories depending on the amount of time a trader expects to spend on a single trade. Today we will consider swing trading, when trades last from one to several days.
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Swing trading is very popular among retail traders for two main reasons. Firstly, swing trading strategies usually involve entry and exit techniques that require you to check the chart, perhaps once or twice a day or no more than every couple of hours. This type of relatively free trading schedule is suitable for busy people or those who work full-time.
As for positional trading, we can also say that its schedule is quite free and suitable for traders engaged in many other activities. This is true, although positional Forex trading is always a trend trading strategy, so profitable positional trading tends to have a low win rate and requires a lot of patience before you can pick up your winnings.
Many retail traders find that dealing with these factors is psychologically exhausting, so they choose swing trading as an alternative in which successful trades can be opened faster.
I personally believe that positional trading is the best profitable way for novice Forex traders. The reason why many people lose their money by choosing swing trading is that they don’t fully realize how serious a problem it is. I will try to explain and show which swing trading strategies and methods are considered the best in Forex swing trading.
Trading on a candlestick chart
Most swing traders have learned to look for certain candlestick patterns that show support and resistance. When it comes to this style, traders are taught to be very selective when choosing trades. They are also encouraged to observe from the sidelines until the whole situation becomes ideal.
Of course, you can make money by trading this way, but it will be difficult to make a lot of money this way. There are several reasons:
- Only some settings look perfect, so many transactions are ignored.
- This style can be psychologically difficult, especially when the trader is on the sidelines and the transaction miraculously unfolds before his eyes on the trading screen. This can lead to the fact that the next time the player will make hasty decisions.
- It is useless to analyze a candle without context. A good analysis should also include elements such as support, resistance, trend, specific time of day and other factors. All other factors themselves are much more powerful than the candles themselves, although traders are taught to focus on the candles themselves.
- Fundamental and quantitative factors are often ignored.
Trend trading is the easiest and most natural way for novice traders to profit from retail Forex trading. However, when it comes to trading in the style of trend trading, there is a lot of confusion. These misunderstandings usually arise from the use of inappropriate investment methods that are more useful for trading stocks or commodities.
Forex currency pairs tend to move much slower than stocks or commodities, so using traditional trend trading strategies will almost certainly lead to losses over time.
Swing traders are looking for profitable trades that can be closed one or several days after entry. It would be very problematic to use such a timeframe in a trading trend. This is due to the fact that, according to statistics, the profit from the Forex trading trend is most often achieved through large transactions that remain open for a very long time.
The key point is that: Forex markets tend to spend more time in “ranking” than in trending. And even if they are trending to some extent, and with some trend correction. The technical name of the rank is “return to the average”; that is, a situation where the price tends to return to the average value.
Average Reverse trade
An alternative to searching for candlestick patterns or breakouts is a trading strategy of returning to the average value. This type of trading is often overlooked, but statistics show why it can be used profitably when trading Forex, especially in swing trading. Historical data shows that the best swing trading indicators are often indicators of a return to the average.
A very simple trading strategy with a return to the average may look like an expectation when the price rises too much. There are many indicators that can be used to measure this, but for now let’s focus on one simple one — just the price.
This trading strategy with a return to the average gives an average profit per trade of 0.25%.
Compare this with a firm trend trading strategy applied at the same time and using the same currency pairs, where the buyer’s transaction is made at the end of each week, which closes above the price 3 months ago, or the seller trades differently.
This trend trading strategy brings an average profit per trade of 0.02%. This is 8 times more trades than the return-to-average strategy.
Finally, let’s see what happens if we combine the two strategies: we only open a trade in which the price has changed by more than 2% at the end of the week against a three-month trend. We trade with the hope of returning to the average value of the transaction. This combination of strategies brought an average profit per transaction of 0.27%.
- Please note that all winnings and losses are gross and do not include the usual spreads/commissions/rollover costs.
Trading with Bollinger Bands
One of the most popular indicators of a return to the average is the Bollinger Band. Usually, when the bands are relatively wide, you enter a position when the price turns away from the outer band, and try to exit when the price approaches the central band. You can also use additional methods for analyzing Bollinger bands.
Earlier we discussed the simple use of price levels, but you can create a more complex strategy for trading on fluctuations that uses a return to the average using Bollinger Bands or other oscillators.
If you really can’t keep trades open for more than a couple of days, the raw statistics show very clearly that over the past few years the odds would have been more favorable for you if you had used a return to the average — possibly in combination with momentum/trend. With this in mind, the classic advice for traders: “buy stocks with an uptrend, sell — with a downtrend” is not surprising. This advice has been preserved for decades.
This doesn’t mean that you won’t be able to make money using more common strategies like breakout. What I’m trying to say is that as long as you don’t have good selection methods that work, the chances of winning are slim.
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