A wide range of trading strategies are used in the forex market on a daily basis, and each one carries advantages and disadvantages. When it comes to delivering results, some techniques boast better track records than others.
Swing trading has earned a strong base of support among forex traders. It’s typically viewed as a fundamental form of forex trading since positions are often held for much longer than a day and not just overnight.
This is because most fundamental traders, or fundamentalists, are swing traders, basing their moves on fundamentals that often require multiple days—or longer—to generate sufficient price shifts that will turn a profit.
As swing trading strategies become more commonplace in the forex market, it’s important to gain a deeper understanding of exactly what’s involved. Let’s take a closer look at the basic strategy behind swing trading.
What Is Swing Trading?
Swing trading is a short-term strategy for a trader who is buying or selling currency using technical indicators that suggest an impending price movement. This trend can span any length of time, ranging from days to weeks. Swing traders place a heavy emphasis on technical analysis as a means of tracking a currency and determining when a “swing” is likely to occur. Swing trading generally means the trader isn’t concerned with the long-term value of a currency; they’re instead looking to profit from peaks and dips in momentum.
Take a look at the big spike in the value of NZD/USD from its low on Sept. 2 to its peak on Sept. 6. Although the currency pair has been somewhat stuck in a monthslong decline, the quick four-day rise is exactly the kind of movement that swing traders are looking for.
You’ll also notice a brief period of consolidation before that price breakout, which is a common indicator traders will use to forecast a swing opportunity. In this case, it’s not about the long-term value of a pair but rather its potential to experience a quick price movement in the near future.
Swing Trading Advantages
On paper, swing trading may sound like a sound methodology, but it’s still a fairly risky approach. However, with risk comes reward. Swing trading carries a number of key advantages that just might give it an edge over other popular trading methods.
Trading Time Flexibility
Many trading methodologies require a long-term investment—long trading hours, long positions, and long-term commitments are often the call of the day.
Swing trading takes a different approach, offering traders a huge amount of flexibility. Because you aren’t holding anything long term and working from price swings, you have a fair amount of trading flexibility. Jumping between sessions is plausible, whereas strictly day trading is another option. Regardless of your trading time preference, swing trading offers flexibility for full-time and part-time traders.
Trading Within Clear Boundaries
Trading within clear boundaries is advised, though gray areas can appear with some trading strategies. Swing trading is heavily based on technical analysis, allowing you to establish more control. Trading strategies that emphasize long positions offer up a wide berth on boundaries, but swing trading can make things easier to read.
In swing trading, your stop-losses are small—especially when weighed against longer-term trades. For example, the stop-losses on a swing trade could be 100 pips when based on a typical four-hour chart, but a stop-loss based on a weekly chart and overall position may be 400 pips.
With this in mind, swing trading allows you to opt for large positions instead of those with low-leverage implications that are common with longer-term trends.
Potential to Dip in and out of the Market
Swing trading allows traders to dip in and out of the market without too much fuss, so you can identify more trading opportunities. Within nearly any financial chart, you will see evidence of an emerging pattern, but swing traders seek support and resistance.
In the NZD/USD example mentioned above, you can cash out your profits once the currency pair hits a certain level of resistance. And if you think the currency is going to resume its downward trend, you could even consider shorting the pair to turn a profit on both sides of the price movement.
This is a popular strategy for traders who are working with currency pairs that offer high volatility. USD/SEK is one such pair, offering a high volume of peaks and spikes over time, as you can see in the three-month graph below.
USD/SEK is often regarded as a more “exotic” pairing because of its high volatility. As a result, the high trading risk makes this pair prime territory for swing traders to try to claim some profits off a dramatic price swing.
By moving in and out of the market at the right times, you can sweep up quick profits and set up other trades in the process. Few other trading strategies offer the flexibility of swing trading.https://www.youtube.com/embed/TmEn9fSWDq4
Easier Movement with the Natural Flow of the Markets
The forex market carries a natural ebb and flow—there is no such thing as a permanent upward or downward trend.
For example, the AUD/JPY currency pairing is known to mirror global investor sentiments. When the global market for investing is strong, this pairing tends to gain in value. By contrast, depressed investing sentiments are mirrored by the pair’s corresponding price movement. By combining this knowledge with other technical indicators, you can use a pair such as AUD/JPY to capitalize on these ebbs and flows, regardless of market fluctuations.
In the best-case scenario, using the right swing trading strategy makes it possible to profit from rising prices during a bull market and falling prices during a bear market. Swing trading doesn’t lock you into any particular market, so you can move with whatever the forex market offers.
Risks of Swing Trading
Although there are undoubtedly profits to be gained in swing trading, there are also risks that come with using swing trading strategies. The biggest risk comes during weekend hours when the forex market is closed. Market changes could cause a price to gap and open at a much different price than its closing, which can put swing traders in a position where a stop-loss is inevitable, leading to a significant net loss.
Swing trading also exposes traders to the ill effects of market volatility, especially given the way swing trades are designed to capitalize on pullbacks and other short-term price movements—many of which may take place within a larger trend. Although volatility generally offers profit potential to seasoned traders, it can increase the risk presented by swing trading.
As a result, traders may miss out on profits that they may have secured just by focusing on long-term trends instead of swing opportunities.
Best Indicators to Use in Swing Trading Strategies
Your success in swing trading is largely dependent on the indicators you use to identify swing potential. Here are some of the most popular indicators used by swing traders:
Although they’re best used in combination with other indicators, moving averages—especially long-term moving averages—can help you identify trend reversals that signal a swing opportunity. They can also help you understand the general strength of that trend.
For example, when a shorter-term moving average crosses a longer-term moving average, it can be a prime signal of the kind of trend reversal that swing traders are looking for. In the NZD/USD chart below, notice how the 50-day moving average (green line) crosses over the 200-day moving average (red line), precipitating a dramatic price drop that swing traders might be eager to capitalize on.
The relative strength index (RSI) is a great tool for identifying potential swing trade opportunities based on bearish or bullish setups—especially for traders who are looking for opportunities within a short time frame.
An RSI above 70 indicates overbought conditions that may precipitate a price decline. An RSI below 30 can indicate underbought conditions in which a currency pair is likely to experience a gain in value.
The CHF/USD chart below illustrates both of these swings at work: oversold conditions that lead to a gain in price, followed by an overcorrection that features overbought conditions, promptly followed by a price decline.
Swing traders could potentially open positions on both sides of this price movement—profiting off the price gain and decline—within a short span of a few hours.
Lines of Support and Resistance
If you’re using Fibonacci or other trading theories, lines of support and resistance can help you identify swing opportunities based on your expectation of a retracement or extension.
If you’re watching USD/JPY trade within a range and the price approaches a line of resistance, you may be eager to open a position with the expectation that the price will reverse course and head toward the correlating line of resistance. You can place a stop-loss above the line of support in case you’re wrong, but this simple approach can make swing trading accessible—and even profitable—to new or inexperienced traders.
Swing Trading Strategies
Now that you understand the advantages and disadvantages of swing trading, let’s take a closer look at some swing trading strategies used in the forex market.
Reversals generally refer to dramatic changes in price that alter the overall price trend. With reversal trading, traders exit positions that are closely aligned with a trend by entering the opposite side of a currently held position. This either takes place leading up to a reversal or when it begins to take place.
Reversals can occur at any time and are typically triggered by some type of social, economic, or political change. When an uptrend occurs, buying interest declines, causing prices to decrease. Meanwhile, selling interest is low during a downward trend, which leads to rising prices.
Unlike a reversal, a retracement is a small change in the overall direction of a price. It is typically a short-term change and isn’t necessarily indicative of an overall trend shift. Once a retracement ends, the previously existing trend should continue.
Retracement trading is a successful swing trading strategy that involves identifying the overall price trend and entering the market in the trend’s direction after the retracement has taken place.
Another swing trading strategy, breakout trading is used by active investors in the forex market when taking a position in the early stages of a trend. Along with minimizing risk when managed properly, breakout trading can work as a strategy for expansions in volatility as well as for major price movements.
A breakout occurs when a currency shows above a line of resistance or below a line of support. It’s typically followed by increased volatility and heavy volume. Traders will then tend to buy the asset as the avenue for profit opens in either direction.
Breakout strategies are ideal during a strong market trend—they encourage buying higher and selling lower. On a chart, breakouts are easily identified as following a time period with tight peaks and valleys. This pattern strongly indicates a volatile market, and if you can predict the breakout, you can increase your potential for earnings.
Also known as a downward move in price, a breakdown typically occurs during heavy trading volume, leading to dramatic price drops that tend to be short-lived.
The direct opposite of a breakout strategy, a breakdown strategy involves traders taking positions during the early stage of a downward trending market, generally as soon as a price breaks a specific level of support.
Learn More About Swing Trading
The long-term view is suitable for some traders, but others want to generate more trading opportunities on a daily basis. Swing trading allows for this by monitoring market movements rather than sitting back and simply waiting for things to fall in your favor.
That’s why swing trading is growing in popularity among traders: It increases control, trading activity, and—most importantly—profit potential.