Forex swing trading is a mechanical trading method that harvests gains from forex pairs over periods of one to several days. Some forex swing trading strategies produce ho-hum results in trendless markets. Yet, I’ve found that a strategy based on 34-day exponential moving averages works well, even during range-bound sideways markets.
With the forex swing trading strategy described below, I use my mechanical trading system to take advantage of short term price trends and patterns that I might otherwise miss out on.
First, let me define the term “forex swing trading.” It means trading based on short-term price ‘swings.’ The price of the forex pair moves back and forth between “swing points,” which are the inflection points within an overall price range or channel.
The direction of the swing trade can be either long or short. Forex swing trading positions are usually held for a longer period than a day-trade, but for less time than buy-and-hold strategies which involve holding positions for weeks or months.
Forex swing trading offers an ideal mechanical trading strategy for independent traders like me, since my algo trading system can quickly recognize and exploit short-term price movements more effectively than large institutional traders can.
The basics of forex swing trading
Although some traders apply swing trading to stocks, in my experience forex swing trading is the perfect form of swing trading.
And, forex swing trading is better than day trading or long-term trend trading. Here’s my reasoning: Although day trading can be good for risk management since the trader doesn’t hold positions overnight, it also limits the profit potential, since large price moves can occur overnight.
Trend trading may capture the profits of longer-term price moves, yet it also puts the trader in a position of facing worrisome drawdowns while awaiting the anticipated continuation of a trend.
Forex swing trading offers the best of both worlds: It has the advantages of trend trading and day trading, but without the drawbacks of either method. The twenty-four-hourly nature of currency markets is ideal for swing trading.
With my mechanical trading system, I enjoy a great compromise between the two extremes of day trading and trend trading. I find short-term trends in the forex markets, ride them to profitability, then I exit my position right when the price move ends.
My mechanical trading system harvests small but consistent gains which add up over time. Even in an apparently-trendless market, I can still be successful.
My trades are based on automatic data analysis in real time, and my trading algos provide super-fast trade executions. Best of all, my trading decisions are based on objective parameters instead of relying on my emotions about a particular market.
Forex swing trading rules
Knowing the best entry and exit points is the key to successful forex swing trading. Through the magic of a mechanical trading system which uses the best indicators and effective algorithms, I don’t need to have perfect timing.
Forex swing trading can be based on a simple set of rules, or you can program your mechanical trading system to use a somewhat more sophisticated set of rules, as I do.
In forex swing trading, my mechanical trading system uses a set of mathematical rules and indicators for buying and selling forex pairs. By relying on my mechanical trading system rather than manual trading, I enjoy several benefits.
Among the simplest approaches are those which measure the price of a forex pair by using 3 different moving averages based on closing prices.
The mechanical trading system is programmed to trade the forex pair “long” when those 3 moving averages become aligned in an upward direction. Likewise, the forex pair is traded “short” when the 3 moving averages are heading downward.
How my forex swing trading strategy works
I use a forex swing trading strategy that lets me take advantage of fairly short-term price moves, so I can profit even in an overall trendless market. I have a reliable and dependable short-term trendline-breakout strategy, and it can harvest quite a few pips from the typical winning trade.
The trick is to use the best length of time frame for the moving averages, as well as the right type of moving average. Rather than using a simple moving average (MA or SMA), I program my mechanical trading system to use an exponential moving average (EMA).
The EMA is similar to the ordinary MA, except that it gives more weight to the most-recent data. I do this because the EMA reacts more quickly to the latest price changes than the simple MA does.
This type of moving average lets me win in markets which would appear trendless over longer periods of time.
Some traders use either a 12-day or 26-day EMA, especially to create indicators such as the popular moving average convergence divergence (MACD) indicator, or a percentage price oscillator (PPO). And, in comparison, the 50-day and 200-day EMAs are often used to signal changes in long-term price trends.
Instead, for my forex swing trading I use the 34-day EMA (also called a 34ema) because I’ve found it offers the best way to determine short-to-mid-term trend direction in forex markets.
Of course, you can experiment by back-testing different time periods in your own chosen markets. Try 7-, 14-, 25-, or 50-day EMAs to see if they work better for your particular forex pair. Still, after my own lengthy research, for me a 34ema works best.
My “buy” rules for forex swing trading
Using my mechanical trading system, I enter the forex swing trade just after a break in the trendline. Based on the 34-day EMA, my mechanical trading system watches for a price rally or pullback. Then, as soon as that rally or pullback falters, my mechanical trading system executes the trade.
So, here are the steps I use. I program my mechanical trading system so it will:
1. Watch for a downward break from the trendline;
2. Confirm that the price moves above the 34-day EMA (34ema);
3. After the trendline breakout downward, watch the price highs of the subsequent candlesticks;
4. Wait to see the signal candlestick; that will be the candle with a high which is lower than the preceding candle’s high;
5. If that candle’s high is breached, my system immediately buys at market price;
6. Or, my system can execute a buy-stop order only a few pips over the high of the signal; candlestick; that way, if the price breaches its high, my order will be executed;
7. If my buy-stop order isn’t triggered, and if the candlesticks continue to set lower highs, my system moves the buy-stop order price to the successively-lower high on each candlestick that forms; eventually, the price will move upward and trigger my order.
For purposes of risk management during forex swing trading, my mechanical trading system automatically places a stop-loss order just a few pips below the low of that candle which triggered my order.
I ride the short-term swing, then harvest the gains and manage the risks as described later in this article.
My “sell” rules for forex swing trading
The “sell” rules for my forex swing trading system are exactly the opposite of the “buy” rules. Using the 34ema as the primary indicator, my mechanical trading system will:
1. Watch for an upward breakout from the trendline;
2. Confirm that the price is below the 34-day EMA (34ema);
3. After the breakout, monitor the price lows of the candlesticks;
4. The signal candlestick will be the one that has a low which is higher than the previous candle’s low; when that candle’s low is broken, my mechanical trading system immediately sells at market price;
5. Alternatively, my forex swing trading program can set a buy-stop order just a couple of pips below the low of the signal candle, so if the price breaches that low, my order is executed.
And, since good risk management is essential for survival in forex swing trading, my mechanical trading system sets a stop-loss order just over the high of the candlestick which triggered my entry order.
Setting profit targets and managing profits in forex swing trading
Forex swing trading works best for me when I’m not greedy. Some traders, especially those whose trading strategies are only profitable during large moves, try to squeeze too much out of every trade. By doing so, they often risk losing all the gains from that trade.
I have a different philosophy. Since markets are often trendless or trading sideways for long periods of time, I have plenty of trading opportunities. I’m not in a hurry to make a “killing” on each trade. I’d rather gain a small amount from many trades, since there is less risk for me that way.
When the trade goes in my direction and I’m in the profit zone, I lock in my profits by programming my mechanical trading system to use trailing stops that move along slightly behind the current price.
I use my mechanical trading system to set the trailing stops just a few pips below or above each of the successive dips and rises during forex swing trading. My forex algorithms choose the trailing stops based on the very-short-term support and resistance levels.
By setting trailing stops this way, I usually avoid being stopped out prematurely. If the short-term trend continues, I can often ride it for several days.
And, I always have plenty of trading opportunities, so I’m not feeling pressured to remain in a marginal trade which turn against me.
Advantages and risk management of forex swing trading
I use short-term trendlines and price action to great advantage. When a price breaks through its trendline, it’s usually a sign that the trend is changing. My mechanical trading system helps me enter a new trade at the beginning of the new trend.
My 34-day EMA forex swing trading strategy gives me plenty of advantages as long as I manage risks appropriately. This strategy lets me trade with the short-term trend while avoiding the major drawdowns that some traders experience by attempting to follow long-term trends.
My 34-day forex swing trading strategy offers a critical advantage over most forex swing trading strategies. Since moving averages are essentially lagging indicators, choosing the right time frame is the key to success.
Many forex strategies are based on simple moving averages or longer-term moving averages. So, they usually perform poorly in trendless markets. Yet, my 34-day EMA strategy uses a time period that’s more effective than longer MA periods.
In order to enjoy the advantages of my system, I must manage the risks appropriately. Overall, the risks of forex swing trading are comparable with any other type of speculative trading.
In markets which are completely trendless over the shortest time periods, it’s important for me to ensure that my stop losses are fairly tight. On the other hand, during bull or bear markets forex swing trading can be even more profitable.
Sometimes, the market will make a sudden sharp move in such a short period of time that the “swing points” won’t be detected by my mechanical trading system. Gap-up or gap-down breakouts can happen so quickly that my mechanical trading system isn’t able to respond effectively.
Still, by using the 34-day EMA, I’m usually able to participate in most market moves, while avoiding false signals in an overall trendless or sideways market.
34-day EMA is the best forex swing trading indicator for me
For me, using a 34-day EMA indicator is the best foundation for my forex swing trading. I’ve used it to develop and fine-tuned a winning strategy for my mechanical trading system. It offers me the “best of both worlds” and it even works in markets which may appear trendless to longer or shorter time periods of moving averages.
And, I’m not the only trader using a 34-day EMA strategy in the forex markets. During the past couple of years there’s been some research about forex swing trading using 34ema as an indicator, as well as plenty of articles and trader chatter about this type of strategy.
If you’re a serious forex trader, and you’re a bit frustrated by markets which seem trendless, I suggest that you try a 34ema strategy for your forex swing trading.