To be successful in forex trading, one of the most common skills a trader must learn is how to follow the trend. But this article won't talk about what's trendy. Instead, it will talk about what's not trendy. History shows that most markets tend to move "sideways" or in a way that doesn't follow a trend more often than they follow a trend. So, how do you trade in markets that aren't moving? "Swing trading" would be the answer most people would choose.
The most important part of swing trading is finding a market that is stuck in a trading range (also called a congestion area) or in an uptrending or downtrending channel on the chart (remember, channel!). When looking at the chart, the trader needs to be able to see clear levels of support and resistance that mark the edges of the congestion area or channel. When a market price gets close to the edge of a support or resistance area, a trader will take a position. If prices are going down and getting close to the support boundary, the trader will go long. If prices are going up and getting close to the resistance boundary, the trader will go short. It sounds easy, but keep in mind that trading is full of surprises. The price could break out of the support or resistance boundary at any time, so being able to act quickly or having good money management skills are always important for an experienced trader.
You can use swing trading techniques on daily, weekly, monthly, and even intra-day charts. Still, the daily bar chart is the most common time frame for swing trading.
Keep in mind that the number of times the market has turned at the boundaries usually shows how strong the support and resistance are there. The rule is that a support or resistance boundary is stronger the more times a market has hit it and then turned around. One could also say that the longer a channel has been around, the more reliable it is. So, a trader who wants to try swing trading needs to find a well-known channel or trading range.
The only time this isn't true is when a market has been in a trading range, but one or two strong spikes show a strong support or resistance boundary. That means that some areas of congestion that might be good places to make a swing trade do not need a lot of pivot points. In fact, those one or two spike levels could be a good place for a market to change direction.
The swing trader should still use protective stops that are tight. As I said, a breakout can happen at any time, maybe because of bad news about politics, etc... Good strategies for managing money will keep traders from getting into trouble. Just outside of a support or resistance boundary that makes up the trading channel or congestion area is a good place to put a protective stop. For example, if a market in a trading channel is getting close to the upper boundary of that channel, the swing trader would open a short position and put his protective buy stop just above the resistance level that serves as the upper boundary of the trading channel.
If, on the other hand, a market is close to the lower boundary, the swing trader would open a long position and put his protective sell stop just above the support level.
In the next article, I'll talk about how to trade in the trending market. When a market is moving in a certain direction, trading would be different. The key is to spot the signs and follow the trends.
