Forex, like any financial market, is expansive and diverse. If you showed ten people a forex price chart, you would get ten different ways of trading it. Some prefer ducking in and out of the markets in minutes. Others will hold their positions for a few hours and call it a day.
Another group may adopt a buy-and-hold approach and close their trades after months. A trading style that is quite appealing, even for beginners, is swing trading. It strikes a balance between quality opportunities while not requiring a lot of time commitment.
This guide will explore the essential concepts of forex swing trading for newbies.
What is swing trading in forex? How does swing trading work?
Swing trading is a type of trading where the investor attempts to capture short to medium-term ‘swings’ over a few days to a few weeks. In rare cases, this could stretch to a few months, either when a pair is moving favorably far or has stalled for some time.
Intraday fluctuations are irrelevant with this trading system as the investor considers where the price may be over days or weeks. Swing traders generally need wider stop losses to remain in positions longer and withstand fluctuations.
A swing trading approach hits the sweet spot between day trading and position trading. On the one hand, you don’t need to actively look for opportunities. This is less time-consuming and stressful compared to approaches like scalping.
A forex swing trader may only execute not more than 10 positions a month. In the same breadth, the investor doesn’t need to hold their trades for very long periods (as with position traders).
Swing traders can have a higher risk to reward in forex, usually a minimum of 1:3. Still, swing trading requires incredible patience in holding times and before trades are taken, which may not suit all personalities.
However, you can exploit all conditions and opportunities, such as trends, counter-trends (or reversal patterns), and sideways markets. For time frames, you need to look at charts from the 4HR to the monthly.
These provide opportunities to forecast a movement that could last for a few days or more. Also, such time frames offer an essential ‘bird’s eye’ view of the markets. Like other trading styles, the lower time frames can be useful for refining entries.
Fundamental analysis may play a role in swing trading forex depending on the strategy and preferred holding time. This is because the effects generally only present themselves over days or weeks.
For example, the interest rate is one of the primary long-term drivers for exchange rates. So, understanding changes in these rates can be beneficial. When swing trading FX, you can explore all the types of pairs in the markets (major, minor and exotic).
However, many traders prefer avoiding exotic pairs due to the higher spreads and volatility. But, these attributes do not matter when your aim is to hold trades for long spells.
Of course, high proficiency in technical analysis is the bread and butter in swing trading. Traders explore a wide range of indicators and interesting chart patterns for opportunities.
We’ll now look at the popular tools and strategies in swing trading, along with tips to help you succeed.
Popular Forex swing trading indicators
Here, we’ll observe the archetypal technical tools used with swing trading
For any forex swing trading strategy, identifying the trend is the foundation of deciding whether to buy or sell. Moving averages (MAs) are the simplest method of identification here. This indicator consists of a ‘moving’ line that reflects the average price (usually the closing price) over a certain time.
The closing price is significant because it shows who will likely be the dominant force over the next session. This idea is useful with higher time frames, considering that traders put greater emphasis on events that have happened over longer intervals than shorter ones.
More trust is given to a candle that closes after one day than one hour. Swing traders observe whether the price is above or below the MA. When it is above the line, it suggests a bullish trend; when it is below the line, it signals a bearish trend.
One crucial factor in moving averages is the chosen period. Forex swing traders will typically stick with the 50, 100, or 200-day MA. These provide a much smoother-looking line, especially the higher in time frame you go.
Swing traders try to eliminate as much as possible to identify the true long-term trends. Lastly, moving averages provide mean reversion through dynamic support and resistance, where the price will swing back toward the line multiple times.
This event may signal a trend resumption where swing traders look to ride the next wave. Below is a picture of the 50-day moving average on EUR/GBP demonstrating this feature.
Relative Strength Index
In physics, you may have heard of ‘quantity of motion,’ something worth observing even for the best swing trading strategies. In forex, studying the momentum gives us an idea about how forceful a trend is in either direction.
One indicator designed for this purpose is the Relative Strength Index, created by the late J. Welles Wilder Jr. It charts the momentum as a moving average on a line graph over a defined phase (usually 14 days).
We refer to the RSI as an oscillator as it swings back and forth between two points: 0 and 100. However, readings below 30 (oversold) and above 70 (overbought) are what traders observe. Oversold suggests a very bearish market, while overbought reflects a very bullish market.
These readings offer information about trend strength but can also indicate a potential pullback in the counter direction. This can be useful for trading reversals. Below is an image of the AUD/JPY 4HR chart with the RSI.
Average True Range
The Average True Range (ATR) is a somewhat under-utilized tool for the average swing forex trading strategy. However, it is useful for a few reasons. Created by the same J. Welles Wilder Jr., the ATR reflects the average volatility of a forex pair in pips.
In simpler terms, it measures how far a forex pair has travelled over a certain period. For instance, if the ATR reads 50 on a 4HR chart, it means that, on average, each candle will likely cover a 50-pip range.
You may ask, why is this information helpful? Firstly, the ATR is not meant to provide trading signals like moving averages or RSI. Still, knowing the pip range is beneficial to set your stops and profit targets appropriately.
One major problem faced by many traders is tight stops. In doing so, the market is likely to kick you out of positions often and quickly. So, the ATR offers a mathematical approach to determining the size of your stop based on your chosen time frame.
For example, if the ATR shows 40 pips at the entry time on a daily chart, your stop loss should be slightly wider than this range. Similarly, the ATR can provide clues about profit targets.
If you planned to hold a position for two weeks, you can observe the ATR reading on the weekly chart. Here, you can calculate the probable number of pips price could travel in this period. Below is a picture of the ATR on the EUR/CAD daily chart.
Types of swing trading forex strategies
Now, we’ll look at the frameworks swing traders use to capture price movements.
As a beginner, the easiest way to trade is with the trend. As we said previously, moving averages can be your best friend at providing a long-term directional bias. The greater the number of days, the more significant a trend is.
Still, one moving average has a static function. When you combine it with another, you can also note trend changes. This is called a moving average crossover. Here, forex swing traders use a lower-period and a higher-period MA, e.g., a 100-day MA with a 50-day MA, or a 200-day MA with a 100-day MA.
The crossover is particularly effective on time frames starting from the daily chart and above. Still, the higher the day length, the fewer crossovers appear. Below is an example of the 50 and 100-day moving averages on the GBP/JPY chart. Note the different trend changes at the circled points.
There are several ways to identify counter-trends when swing trading forex. While we’ve covered the moving average crossover, another tried-and-tested method is to use divergences. This feature only applies to oscillators like the RSI, CCI, and stochastics.
A divergence happens when there is a mismatch between the indicator and the price. Naturally, an oscillator will trace the zig-zag motion of the market, displaying all its highs and lows.
In an uptrend, the price makes higher highs (HH) continuously. However, a divergence occurs when the indicator prints a lower high (LH). Let’s look at the chart below.
We can see a bearish divergence on the 4HR chart of EUR/JPY. The RSI shows a HH and LH while the price reflected two higher highs. Eventually, the market reversed.
As we know, markets never move in a straight line. Sometimes, a forex pair will move between zones for several days or weeks. Exploiting range-bound conditions is something you can achieve with forex swing trading strategies.
The key is to use the daily, weekly, or monthly time frame because levels on these charts are seen as powerful. You also need to identify support and resistance and look for bounces between each area.
The weekly chart below shows that the NZD/USD was moving in a range between the 0.68620 and 0.74860 price levels.
We can see the market bounced off roughly around these prices a few times during August 2016 and June 2018. Notice how the price responded by moving substantially in one direction. Of course, you need to confirm other factors with range trading, but you should get the general idea.
Another component you can exploit here is breakouts. At some point, the market eventually breached the support area at 0.68620 and moved down. These are other scenarios to anaylze with any swing trading forex strategy.
Pros and cons of Forex swing trading
Here are the advantages and disadvantages of this trading approach at a glance:
|Being a forex swing trader is less stressful and time-consuming. It allows the individual to spend a few hours daily or weekly while keeping a job or engaging in other activities.||Swing trading needs a tremendous amount of patience with no guarantee of outcomes. Days or weeks may pass holding a position or waiting for an opportunity.|
|You incur lower intraday fees because the frequency of execution is less. Also, the greater profits massively outweigh the trading costs.||There is potential exposure to negative swaps, which may be noticeable (especially with exotic pairs) depending on the pair and trading direction.|
|Forex swing traders often use wider stops, allowing them to stay in trades for longer periods.||You may be exposed to overnight and weekend risk where spreads could widen, gaps may happen, etc.|
|Swing trading offers potentially higher rewards with less risk due to the longer holding times.||It may require deeper analysis to uncover the driving forces behind long-term moves.|
|Swing traders can take advantage of a wider selection of markets like exotic pairs.||–|
Tips for swing trading successfully
As a quick note, you should be careful trading exotic pairs as they tend to be erratic. Also, the spreads may be too high for some traders. One solution is to consider a zero spread account. This account offers a lower spread with a fixed commission, making it a useful feature.
Overall, becoming a successful forex swing trader is a combination of:
Adopting a patient and long-term approach
It may take some time to get used to the psychology of taking things slow, unlike other fast-paced trading methods. Higher time frames depict price action in a more measured way.
The rationale behind the best swing trade strategies is favoring quality over quantity, and carefully selecting opportunities. As mentioned before, swing traders only execute a handful of positions monthly.
A patient approach is also about not being bogged down by intraday fluctuations. It’s easy to close your trades in a few hours at the slightest sign of the market going against you.
It’s crucial to remain calm during these occasions and trust your analysis. A swing trader has a grander vision of where the price may be over days or weeks.
Using a high risk to reward ratio
The whole point of forex swing trading is to have a few positions with large profits than many positions with small profits. Time is one factor in achieving this, but it is certainly not the only one.
A high risk-to-reward ratio (RR) is crucial. Most literature suggests at least 1:3 for a swing trader. So this means that you plan to gain $300 for every $100 you risk. However, you can aim for a lot more than this ratio.
As your RR increases, it means that you don’t need to have many winning positions. Short-term traders require a higher win rate because they place more trades with small profits. However, a swing trader places fewer positions where the high gains can compensate for the losses.
Of course, money and risk management also play a role in forex swing trading. You must understand position sizing and never let your losses exceed a reasonable amount to protect your equity.
Spending less time on the charts
A massive benefit of swing trading in forex is that the investor needs little screen time. This approach enables them to have a full-time job, run a business, a side hustle, or other activity and still capitalize on trading opportunities.
Experienced traders generally don’t spend more than an hour daily looking at charts. They may use a mobile trading platform for price alerts or check the markets periodically.
The point is that you shouldn’t be glued to your computer screens for long. This frees up your time during the day and allows you to explore other activities. It also shields you from unfavorable market conditions common for intraday traders.
When you swing trade forex, you are not bound to the idea of closing your positions before the next day or in a few hours. Rather, this approach allows you to ride price movements as long the momentum still exists.
At the same time, a position is not held for months or years as with typical buy-and-hold strategies. This is why swing trading is the happy medium between day trading and position trading.