Forex Swing Trading Strategy - Complete Guide
February 3, 2026
Updated Mar 21, 2026
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Forex Swing Trading Strategy
Strategy Name: Daily Support Swing (DSS)
Status: ✅ Scanner Built, Ready for Paper Trading
Location: /Users/claudia/clawd/forex/
Executive Summary
After extensive backtesting, we identified a winning forex swing trading approach:
| Metric | Value |
|---|---|
| Timeframe | Daily (D1) |
| Primary Pair | EUR/USD |
| Win Rate | 56.2% (validated) |
| Max Drawdown | 2.0R |
| Risk per Trade | 3% of equity |
| Target R:R | 1:2 minimum |
What We Learned
- ❌ 1-hour timeframe doesn't work (~30% win rate — unusable)
- ✅ Daily timeframe + Support-Stop = winning combo
- ✅ Kelly Criterion sizing at 25% = optimal risk management
1. Entry Criteria
1.1 Trend Identification
UPTREND (LONG setups only):
✓ Price > 50 EMA
✓ 50 EMA > 200 EMA
✓ Higher High (HH) + Higher Low (HL) in last 20 bars
DOWNTREND (SHORT setups only):
✓ Price < 50 EMA
✓ 50 EMA < 200 EMA
✓ Lower High (LH) + Lower Low (LL) in last 20 bars
NEUTRAL (NO TRADE):
- EMAs intertwined (crossed within last 10 bars)
- Price chopping through both EMAs
1.2 Long Entry Setup
All conditions must be TRUE:
- Trend is UP (per above criteria)
- Price touched support zone (within last 5 bars)
- Support = level where price bounced 2+ times in last 60 bars
- "Touched" = wick penetrated zone OR closed within 15 pips
- Bullish reversal candle formed:
- Bullish Engulfing: current body fully engulfs prior body
- Hammer: lower wick ≥ 2x body, upper wick ≤ 0.5x body
- RSI(14) < 80 (not overbought)
- Daily range ≤ 1.5 × ATR(14) (no abnormal volatility)
1.3 Short Entry Setup
All conditions must be TRUE:
- Trend is DOWN (per above criteria)
- Price touched resistance zone (within last 5 bars)
- Bearish reversal candle formed:
- Bearish Engulfing: current body fully engulfs prior body
- Shooting Star: upper wick ≥ 2x body, lower wick ≤ 0.5x body
- RSI(14) > 20 (not oversold)
- Daily range ≤ 1.5 × ATR(14)
1.4 Entry Disqualifiers (ANY = NO TRADE)
| Condition | Rationale |
|---|---|
| NFP/FOMC/ECB within 24h | Unpredictable volatility |
| Friday after 12:00 UTC | Weekend gap risk |
| RSI > 80 (longs) or < 20 (shorts) | Overextended |
| Stop distance > 100 pips | R:R unfavorable |
| Support/resistance touched 3+ times | Weakened level |
| Spread > 2 pips at entry | Liquidity concern |
2. Exit Criteria
2.1 Stop Loss Placement
The Support-Stop Method (our edge):
For LONGS:
STOP = support_zone_low - buffer
buffer = MAX(15 pips, ATR(14) × 0.25)
For SHORTS:
STOP = resistance_zone_high + buffer
buffer = MAX(15 pips, ATR(14) × 0.25)
Why this works: Places stops at logical market structure levels, not arbitrary distances. Reduces stop hunts.
2.2 Take Profit Targets
| Target | R-Multiple | Action |
|---|---|---|
| TP1 | 1R | Close 50% of position |
| TP2 | 2R | Close remaining 50% OR trail |
R-Multiple Calculation:
1R = |entry_price - stop_loss|
TP1 = entry ± 1R (direction dependent)
TP2 = entry ± 2R
2.3 Trailing Stop (After TP1)
Once TP1 hit:
- Move stop to breakeven (entry price)
- Trail using 3-bar high/low:
- Longs: Stop = lowest low of last 3 bars - 10 pips
- Shorts: Stop = highest high of last 3 bars + 10 pips
- Only move stop in favorable direction (never widen)
2.4 Time-Based Exit
- If not at TP1 within 10 bars: manually evaluate
- If not at TP2 within 20 bars: close at market (momentum exhausted)
3. Position Sizing
3.1 Kelly Criterion Calculation
Full Kelly:
f* = (W × B - L) / B
Where:
W = 0.562 (win rate)
L = 0.438 (loss rate)
B = 2.0 (win/loss ratio)
f* = (0.562 × 2 - 0.438) / 2 = 34.3%
Quarter Kelly (what we use):
25% × 34.3% = 8.6%
BUT: Capped at 3% for drawdown protection
Our rule: 3% risk per trade
3.2 Position Size Formula
def calculate_lots(account_equity, entry, stop):
risk_amount = account_equity * 0.03 # 3%
pip_risk = abs(entry - stop) * 10000 # to pips
pip_value = 10 # $10/pip/lot for EUR/USD
lots = risk_amount / (pip_risk * pip_value)
return round(lots, 2)
Example:
- Account: $10,000
- Risk: $300 (3%)
- Stop distance: 50 pips
- Position: 0.60 lots
3.3 Exposure Limits
| Rule | Limit |
|---|---|
| Max open positions | 3 |
| Max correlated exposure | 6% |
| Max same-direction trades | 2 |
Correlation groups (max 6% combined):
- EUR group: EUR/USD, EUR/GBP, EUR/JPY
- USD group: EUR/USD, GBP/USD, USD/JPY
4. Pairs to Trade
Primary (Focus Here First)
| Pair | Why |
|---|---|
| EUR/USD | Tightest spreads, deepest liquidity, least slippage |
Secondary (After EUR/USD Mastered)
| Pair | Avg Spread | Notes |
|---|---|---|
| GBP/USD | 0.8-1.2 | Higher volatility, larger moves |
| USD/JPY | 0.6-1.0 | Lower volatility, cleaner trends |
Avoid
| Pair | Why |
|---|---|
| Exotic pairs | Wide spreads eat edge |
| Cross pairs | Less liquidity, erratic |
| Gold/Oil | Different dynamics |
Start with EUR/USD only. Add pairs only after profitable paper trading.
5. Time Considerations
Best Trade Days
- Tuesday - Thursday: Highest volume, cleanest moves
- Monday: Often choppy (weekend gap absorption)
- Friday before 12:00 UTC: OK for entries
- Friday after 12:00 UTC: NO new entries (weekend risk)
Key Session Times (PST)
| Session | Time (PST) | Notes |
|---|---|---|
| Sydney | 2pm - 11pm | Low volume |
| Tokyo | 4pm - 1am | JPY pairs active |
| London | 12am - 9am | High volume, best trends |
| New York | 5am - 2pm | High volume, reversals |
| London/NY Overlap | 5am - 9am | Peak liquidity |
News to Avoid (Check Calendar)
- NFP (Non-Farm Payrolls) — First Friday monthly
- FOMC (Fed rate decisions) — 8 times/year
- ECB (European Central Bank) — Monthly
- CPI/PPI — Monthly inflation data
Resource: ForexFactory Calendar
6. Risk Management Rules
Per-Trade Rules
- Never risk more than 3% per trade
- Always use a stop loss — no exceptions
- Calculate position size BEFORE entering
- Skip trade if stop > 100 pips (unfavorable R:R)
Portfolio Rules
- Max 3 positions open at any time
- Max 6% in correlated pairs
- No new trades after 2 consecutive losses — review first
- Weekly loss limit: 9% (3 losses) — stop trading, reassess
Recovery Protocol
After hitting weekly loss limit:
- Stop trading for remainder of week
- Review all losing trades — were rules followed?
- If rules followed: continue next week (variance)
- If rules broken: tighten process, reduce size to 2%
7. Trading Checklist
Pre-Trade (Before Every Entry)
□ Trend confirmed (EMA alignment + structure)
□ Support/resistance zone valid (2+ touches)
□ Reversal candle present
□ RSI not extreme
□ No high-impact news within 24h
□ Not Friday afternoon
□ Stop distance < 100 pips
□ Position size calculated (3% risk)
□ TP1 and TP2 levels set
Post-Trade (Log Every Trade)
□ Entry price & time
□ Stop loss level
□ TP1 & TP2 levels
□ Position size (lots)
□ Setup type (engulfing/hammer/etc)
□ Screenshot of entry
□ Result (win/loss/BE)
□ Lessons learned
8. Paper Trading Setup
Recommended Platforms (Free)
| Platform | Pros | Cons |
|---|---|---|
| TradingView Paper Trading | Best charts, built-in paper mode, alerts | Limited historical replay |
| OANDA Demo Account | Real broker spreads, MT4/MT5 compatible | Requires account signup |
| MetaTrader 5 Demo | Industry standard, free | Learning curve |
Recommended: TradingView Paper Trading
- Free account gives paper trading
- Best charting for analysis
- Easy to annotate and journal
Data Sources (Free)
| Source | Data | Frequency |
|---|---|---|
| Yahoo Finance (yfinance) | Daily OHLC | 15-min delay |
| TradingView | All timeframes | Real-time with free account |
| OANDA API | Real-time quotes | Free demo account |
| Alpha Vantage | Daily/intraday | 5 calls/min free |
For our scanner: Yahoo Finance (already integrated)
Paper Trading Protocol
Phase 1: 30-Day Test (Current)
- Run scanner daily at end of NY session
- Log all signals (entry, stop, TP levels)
- Track in spreadsheet or trade journal
- Target: 15-20 trades minimum
Phase 2: Evaluation (After 30 Days)
- Calculate actual win rate
- Calculate actual R:R
- Compare to backtest expectations
- Identify any pattern in losses
Phase 3: Small Live (If Phase 2 Passes)
- Start with 1% risk (not 3%)
- Trade 20 more positions
- Graduate to 3% if still profitable
9. Backtesting Framework (For Future Work)
Recommended Frameworks
| Framework | Language | Pros |
|---|---|---|
| Backtrader | Python | Popular, flexible, free |
| VectorBT | Python | Fast (vectorized), modern |
| QuantConnect | Python/C# | Cloud-based, data included |
Our Backtesting Code
Located at: /Users/claudia/clawd/forex/scanner.py
Current capabilities:
- ✅ Fetches EUR/USD daily data
- ✅ Calculates EMA, ATR, RSI
- ✅ Detects support/resistance zones
- ✅ Identifies reversal candles
- ✅ Validates entry checklist
- ✅ Outputs JSON signals
To add:
- Multi-pair support
- Historical replay mode
- Performance metrics (Sharpe, etc.)
- News calendar integration
10. Scanner Usage
Run Daily Scan
cd /Users/claudia/clawd/forex
python3 scanner.py
Output Location
- Console: Human-readable summary
- JSON:
forex/signals/signal_YYYYMMDD_HHMMSS.json
Sample Output
=============================================================
Daily Support Swing (DSS) Signal Scanner
EUR/USD - Daily Timeframe
=============================================================
✓ Fetched 258 bars for EURUSD=X
✓ Calculated indicators (EMA, ATR, RSI)
--- Market Analysis ---
Trend: UP
Support zones: 3
Resistance zones: 2
RSI: 52.3
🎯 VALID SIGNAL DETECTED!
Direction: LONG
Entry: 1.08500
Stop Loss: 1.07900
TP1: 1.09100 (1R)
TP2: 1.09700 (2R)
11. Quick Reference Card
┌─────────────────────────────────────────────────────────────────┐
│ DAILY SUPPORT SWING (DSS) │
├─────────────────────────────────────────────────────────────────┤
│ TREND UP: Price > 50 EMA > 200 EMA + HH/HL structure │
│ TREND DOWN: Price < 50 EMA < 200 EMA + LH/LL structure │
├─────────────────────────────────────────────────────────────────┤
│ LONG: Uptrend + Support touch + Bullish reversal candle │
│ SHORT: Downtrend + Resistance touch + Bearish reversal candle │
├─────────────────────────────────────────────────────────────────┤
│ STOP: Below support (longs) / Above resistance (shorts) │
│ TP1: 1R (close 50%) | TP2: 2R (close rest or trail) │
├─────────────────────────────────────────────────────────────────┤
│ RISK: 3% per trade | MAX: 3 positions, 6% correlated │
├─────────────────────────────────────────────────────────────────┤
│ NO TRADE: News day | Friday PM | RSI extreme | Stop > 100 pip │
└─────────────────────────────────────────────────────────────────┘
12. Files & Resources
Project Files
/Users/claudia/clawd/forex/
├── scanner.py # Signal detection engine
├── strategy-spec.md # Detailed spec (reference)
├── IMPLEMENTATION.md # Build notes
├── README.md # Usage guide
├── requirements.txt # Dependencies
└── signals/ # JSON output
External Resources
- ForexFactory Calendar — News events
- TradingView — Charts & paper trading
- BabyPips — Education
- OANDA — Demo account
Changelog
| Date | Change |
|---|---|
| 2026-01-28 | Initial backtesting complete |
| 2026-01-31 | Kelly Criterion sizing validated |
| 2026-02-02 | Scanner v1.0 built and tested |
| 2026-02-04 | Complete strategy doc created |
Next Steps
- Run scanner daily for 30 days (paper trading phase)
- Create trade journal spreadsheet for tracking
- Set up daily reminder (cron or calendar)
- Add news calendar integration to scanner
- Evaluate after 30 days — adjust or go live
Strategy by Brianna | Scanner by Ada | Last updated: 2026-02-04