Day traders only leave their positions open for a minimum time (from minutes to hours) and, consequently, tend to make numerous trades per day. Day traders usually close their trades at the end of the day with the deliberate intention of not leaving them open overnight.
Day trading utilizes high amounts of leverage and short-term trading strategies to capitalize on the small price movements in highly liquid currencies. Many Forex Traders shy away from this type of trading because they consider the rewards to not justify the risks.
They consider that the success rate is inherently lower as a result of the higher complexity and inherent risks. Without doubt, day trading demands both an in-depth understanding of how the markets work as well as a strong appreciation of strategies capable of producing profits in the short term. By keeping their trades for only a short while, day traders reduce their exposure to spike movements and sudden reversals and minimize their risk levels as a result. Many Forex beginners find that the sheer task of undertaking dozens of trades per day is just too great a white-knuckle ride with their inadequate experience and resources.
In contrast, Swing traders use technical analysis to look for currency pairs with short-term price momentum and then sustain trades for a number of days up to a couple of weeks depending on their results. They will trade currency pairs on the basis of their intra-week or intra-month oscillations between oversold and overbought conditions. As such, swing trading is considered to be best implemented when the Forex markets are flat and not following a trend. Please note, however, that some swing trades could still be fully completed in a single trading day if both entry and exit signals occur during that day.
Swing traders are not concerned about the perfect timing to buy a currency pair exactly at its bottom and sell exactly at its top (or vice versa). In a perfect trading environment, they will, for example, wait for a confirmed oscillator crossover before entering the market. In such a case, when taking profits, the swing trader will exit the active trade as close as possible to the next oscillator crossover.
Swing Trading is probably not only a very good trading style for the Forex beginner but it still also offers significant profit potential for intermediate and advanced traders. This is because Swing Traders receive sufficient feedback on their trades after a couple of days to keep them motivated. In addition, their long and short positions of several days are of the duration that does not lead them to distraction or loss of concentration.
Swing Trading has a significant advantage over Day Trading in that it provides the basis for a simple trading system. This is because its recommended entry and exit conditions, i.e. oscillator crossovers, or other Technical Analysis signals, can be readily defined by a consistent set of rules.
However, not all of its recommended entries guarantee profits. For instance, your oscillator’s reading may be in an overbought condition but the market would not realize this. As a result, further up trend (bull) action of hundreds of pips can still occur which could cause your trade to reach its stop loss price incurring a financial loss for you in the process.
To counter this sort of losses, you will need to undertake both extensive back-testing of historical data and then live-testing in order to determine your strategy’s win to loss ratio and expectancy value. By performing these actions, you will then have a much better idea about the average profit your Forex Trading System will provide you over the long haul for every $1
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