2Bull Forex Blog

Swing trading is a very popular technique used by Forex retail traders. In this article, I will discuss what it takes to succeed in swing trading, as well as the most common mistake made by swing traders.

What is Swing Trading?

The currency market is famous for large price fluctuations. Prices may ‘swing’ upwards one week, and later ‘swing’ downwards the next week. Swing traders are people who attempt to ride these large price ‘swings’ to profit from them.

For example, if I believe that the current market price is reaching its peak, I may enter into a sell trade in expectation of profiting from (what I believe will be) a subsequent drop in price in the very near future.

Swing trades are typically held for a few days up to a couple of weeks, depending on the strength of the prevailing ‘swing’.

Why is Swing Trading so popular?

This form of trading is particularly popular in the currency markets because the markets are often ranging. This characteristic allows ample opportunity for swing traders to choose which market ‘wave’ to ride on.

Also, unlike the small profit targets of a scalping trade, swing trades potentially yield a much bigger profit. A scalp trade may net an average of about 10 - 20 pips profit, but a swing trade can yield as much as 100 pips or more per trade.

The most common mistake made by Swing Traders

Because the nature of swing trading involves the prediction of market tops and bottoms, many traders invariably make the mistake of incorrectly estimating the end of a ‘swing’.

For example, as the market price begins to turn around on an uptrend, a swing trader may incorrectly perceive it to be a trend reversal signal. However, this turnaround may only be a temporary price retracement before the market continues on the upward movement, causing the trader to suffer from a potentially large loss.

Swing trading is not as easy as it looks, and many traders get burnt because they don’t know how to properly estimate market tops and bottoms.

There are many Forex retail traders who attempt to hedge their trades after suffering from substantial equity losses. While this may seem like a good way to limit their losses, a hedging strategy may not necessarily be any help at all. In this article, I will discuss why hedging trades may be a bad idea if you want to limit your trading losses.

What is Hedging?

The objective of hedging a trade is to reduce the potential losses that may otherwise have been incurred without the hedge.

For example, let’s say I go long on the EUR/USD at price 1.4030. The market immediately goes against me an plunges to 1.4010, resulting in an unrealized loss of -20 pips.

In order to hedge against further losses, I enter into a second trade: shorting at 1.4010 (which is the current market price). This way, if prices fall even further, at least I won’t lose any more pips. If prices fall by a further 5 pips, I would lose 5 pips in my initial long position and gain 5 pips in my second short position, netting a total of zero pips.

The problem with Hedging in this manner

This form of hedging is very attractive to inexperienced traders who don’t really understand what they’re doing. At first glance, it looks as if hedging can stop a trader from suffering from further losses, while allowing for the potential of the trade to turn around in his favour. And this is the exact manner of thinking that causes many traders to mistakenly enter into hedging trades like the one I just showed you.

Here’s the problem with this method of hedging:

Even if price do turn around in my favour and moves back up to the price of 1.4030, I will still be suffering from an unrealized loss of -20 pips! Why?

Because even though my initial long trade broke even (current market price at 1.4030 is the same price I went long), my second short trade will be suffering from a -20 pip unrealized loss (remember I shorted at 1.4010), netting a total unrealized loss of -20 pips!

Can you see how that even when prices manage to go back up in my favour, hedging STILL causes me to lose money? If I didn’t hedge at all, I would have at least broken even by now.

And that’s not all. Because I entered into a second (hedging) trade, I had to pay extra transaction fees via the bid/ask spread!