Successful forex trading generally requires that traders adhere to a particular strategy or trading style. Depending on the trader’s temperament and psychological profile, some strategies will work better than others to achieve profits.
Traders have widely used various swing trading strategies in the stock and commodities market for decades. Swing trading has also become popular among online retail forex traders because of its more relaxed pace and potential for decent returns compared to day trading and scalping strategies.
In this article, Benzinga explains what swing trading entails and describes several forex swing trading strategies that you can include in your forex trading plan.
What is Swing Trading in Forex?
Swing trading in the forex market can best be described as a trading style that aims to capture short- to medium-term profits from movements in an exchange rate over a time span of a few days to a few weeks.
Swing trading generally occurs in a medium-term timeframe of a length somewhere between the trade durations of short-term day traders and long-term trend traders. Swing traders also generally operate at a more relaxed pace than day traders and scalpers.
The swing trading style lets you take advantage of the significant directional exchange rate movements or trends that sometimes take place in the forex market, as well as to profit from corrections to those moves. Because of the way that trends typically extend and then correct, a swing trader’s profits should easily exceed those of a trend trader.
Forex traders who are unconcerned about holding a position through multiple forex trading sessions could find swing trading an excellent strategy choice when executed with discipline based on solid trading signals.
Keep in mind that swing trading strategies vary considerably among different traders. Although some do take fundamental factors into account, most swing traders rely heavily on technical analysis to swing trade forex currency pairs.
For example, some might watch for consolidation phases that could subsequently show breakouts as part of a continuation chart pattern. Others might use momentum indicators and oscillators such as the Relative Strength Index (RSI) and the Stochastic Oscillator to look for waning momentum during a trend that can signal a market reversal and generate buy and sell signals.
Swing traders might also identify support and resistance levels on exchange rate charts that let them determine future price action for optimal entry and exit points for their trades.
Forex Swing Trading Example
Consider an example of a forex swing trader operating based on the Fibonacci Retracement levels that will be described further in the following section under Retracement Trading. The trades this swing trader might make based on the chart of AUD/USD shown below will be contrasted to those a trend trader might make for comparison purposes.
Exchange rate chart of AUD/USD indicating short and long swing trades with red and blue arrows respectively. RSI divergence is shown with red trendlines. Source: MetaTrader5.
The AUD/USD exchange rate made a high of 0.7661 on April 5. At that high, the swing trader noticed momentum was waning due to the appearance of bearish divergence near the 70 overbought level on the 14-day RSI indicator shown below the exchange rate chart, so they established a short position at 0.7600.
On May 12, bullish divergence on the RSI in oversold territory prompted the swing trader to close out that short position at 0.6900 for a gain of 0.7600 - 0.6900 = 0.0700 or 700 pips and reverse it to establish a long position at 0.6900.
On June 3, the swing trader closed out that long position at 0.7200 for a gain of 0.7200-0.6900 = 300 pips. They also went short at that level in anticipation that the previous downtrend would reassert itself.
On July 14, indecisive candlestick patterns and a failure to reach into oversold territory by making new lows on the RSI suggested that an upside reversal was likely, so the swing trader prudently squared their short position and went long at 0.6700 for a realized gain of 0.7200-0.6700 = 500 pips.
On August 7, they closed their long and went short at 0.7100, realizing a profit of 0.7100-0.6700 = 400 pips. The swing trader then ran this short down to the 0.6200 level on October 13 when bullish RSI divergence in oversold territory signaled an upside reversal was imminent, thereby netting a gain of 0.7100-0.6200 = 0.0900 or 900 pips.
The swing trader then noticed a bearish spinning top appear on the candlestick chart on November 16, so they sold out their long position and went short at the 0.6700 level for a net gain of 0.6700-0.6200 = 500 pips. Their overall realized gain to this point was 3,300 pips.
Now compare the impressive return this swing trader earned to that of a trend trader who might also have shorted the market at 0.7600 near the April 5 high and then closed out their short near the 0.6200 low of October 13 for a notably smaller net gain of 0.7600-0.6200 = 0.1400 or 1,400 pips.
Basically, the swing trader who traded seven times in this example would have been 237% more profitable overall than the trend trader who only traded twice. This outcome illustrates the strong appeal of swing trading to those forex traders who know how to do it successfully.
Swing traders use a variety of strategies, with the common thread among them being that they generally attempt to profit from market corrections as well as trends. Three of the most popular swing trading styles used by forex traders are described in further detail below.
3 Popular Types of Swing Trading Strategies
Swing traders use a variety of swing strategies, with the common thread among them being that they generally attempt to profit from market corrections as well as trends. Three of the most popular swing trading styles used by forex traders are described in further detail below
1. Retracement Trading
R. N. Elliott modified his eponymous Wave Theory that many advanced technical analysts subscribed to in the early 1940s to include the idea that market corrections usually retrace the preceding trend by certain percentages of that trend’s length. He observed that those percentages correspond to ratios of successive numbers found in the so-called Fibonacci sequence.
This Fibonacci sequence was first published in the early 1200s as a mathematical solution to a problem regarding the reproduction of rabbits. The series starts with 0 and 1, and you can calculate the subsequent terms series by adding 0 and 1 to get 1 and then adding 1 and 1 to get 2, and so on.
Basically, the series progresses by adding two sequential numbers to get the next number. This process results in the infinite Fibonacci sequence that starts as follows:
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on…
Several interesting mathematical relationships have been observed regarding the ratios of numbers in this series. These include:
- The ratio of a number in the sequence to the following number approaches 0.618, which is known as the Golden Mean.
- The ratio of a number in the sequence to the number two places higher approaches 0.382.
- The ratio of a number in the sequence to the number three places higher approaches 0.236.
These ratios can be expressed as percentages to result in the classic Fibonacci retracement levels of 23.6%, 38.2% and 61.8%. Most Elliott Wave Theorists and others using Fibonacci retracement levels also add these percentages:
- 0%: The ratio of the numbers 0 and 1 found at the start of the Fibonacci sequence.
- 50%: The ratio of the numbers 1 and 2 found early in the sequence.
- 100%: The ratio of the numbers 1 and 1 found early in the sequence.
On a somewhat controversial note, many technical analysts also compute the difference between 100% and 23.6% to get a 76.4% level to fill in the large gap between the 61.8% and 100% retracement levels. Some analysts prefer to use the square root of 61.8% or 78.6% instead, while others might use both of those numbers in the absence of a general consensus on the best number to use for this purpose.
This results in the following full set of retracement levels based on the Fibonacci sequence:
- 0%, 23.6%, 38.2%, 50%, 61.8%, 76.4% and/or 78.6%, and 100%.
Elliott proposed using these percentages of a preceding directional market move to trade market corrections as a set of retracement objectives. Many trading platforms and technical analysis charting software will now include a set of Fibonacci retracement levels as a trading indicator you generally draw from the start of a trend to its reversal point.
In practice, if a Fibonacci retracement level breaks during a market correction, it sets up the following Fibonacci retracement level as a target for the correction’s continuation. A stop loss in this case would be placed safely on the other side of the broken Fibonacci retracement level just in case the market reverses unexpectedly.
Also, if the key 61.8% Fibonacci retracement level breaks, the correction will usually return to the starting level of the preceding trend, yielding a full 100% correction. On the other hand, if the market returns back to levels situated between the start of the correction and the preceding trend’s 23.6% retracement level, then the pullback is likely over and a fresh trending move in the same direction as the preceding trend would be anticipated.
2. Reversal or Momentum Trading
For a swing trader, reversal trading typically involves waiting for periods of waning market momentum that suggest a market reversal may soon be forthcoming as ambivalence and profit-taking start to prevail over those participants still enthused about the trend. A trade is then quickly executed to close out any existing trend-following positions and establish a contrary position to profit from the expected market reversal.
Forex swing traders often look for major reversals in exchange rates by using signals like moving average crossovers in combination with divergence in extreme territory on momentum indicators like the RSI to signal the right time to establish a counter-trend position with the goal of profiting from a trend reversal.
Momentum generally refers to the tendency of a market to continue a trend. Swing traders keep a keen eye on momentum indicators since a weakening in market momentum could indicate an upcoming reversal. Such directional shifts present excellent opportunities for astute swing traders to take advantage of.
Momentum and rate of change (ROC) indicators show the difference between the closing value of an exchange rate today compared to its closing value of X days ago. Momentum would indicate the absolute difference in the exchange rate, while the ROC indicator scales according to the older number and represents the change in value as a percentage.
These two momentum indicators typically show a positive number in an ascending market and a negative number in a downward-trending market. Therefore, a crossover at the zero point on a graph could serve a swing trader as a buy or sell signal depending on what direction the indicator was moving just before the crossover.
Another popular momentum indicator many swing traders use is the RSI. This bounded swing trading indicator is smoother and not as susceptible to distortion compared to the momentum and ROC indicators. Its value fluctuates between 0 and 100, with a level of 50 being neutral while extreme levels above 70 are considered overbought and levels below 30 are considered oversold.
For example, a swing trader might use a momentum indicator like the RSI by going long when the indicator rises back above the oversold 30 level after having fallen below it. Alternatively, they could go long after seeing the RSI indicator display bullish divergence in oversold territory. This occurs when the exchange rate makes a new low but the indicator fails to do so at oversold levels below 30.
On the other hand, a swing trader could wait until the RSI falls back below the 70 level after becoming overbought to establish a short position, or they could instead opt to go short after observing bearish divergence in overbought territory.
3. Breakout Trading
Swing traders who use a breakout forex trading strategy will typically identify levels of support and resistance on an exchange rate chart. Support indicates where supply has been exhausted in a currency pair and the exchange rate needs to rise to attract sellers, while resistance shows where the exchange rate has risen to the point that has satiated the market and the rate must drop to attract buying interest.
Taken together, these support and resistance levels show up on exchange rate charts to create a trading range. This chart pattern develops between two parallel horizontal lines that a swing trader can draw to assign likely support and resistance levels.
A breakout from a trading range occurs when market forces eventually overcome either the upper resistance level or the lower support level situated at the extremes of the trading range.
The breakout then sets up an exchange rate target for a subsequent measured move that equals the vertical distance between the support and resistance lines projected vertically from the breakout point in the direction of the breakout. Stops are usually placed safely on the other side of the breakout point.
If an upside breakout occurs, then the target is set above the trading range, but if a downside breakout occurs, then the target lies below the trading range at a distance equal to the range’s width. The subsequent course of action depends on which direction the breakout occurs in.
For example, if an upside breakout occurs, then a swing trader might take advantage of the opportunity by going long. They might also:
- 1. Buy dips because the market often falls to retest the range top after breaking out to the upside.
- 2. Put a stop loss sell order safely within the broken trading range.
- 3. Place a take-profit sell order just below the measured move’s target exchange rate level to better ensure its execution.
On the other hand, if a downside breakout occurs, a swing trader might take the opportunity to establish a short position. They might also:
- 1. Sell rallies up to the range’s bottom line because the market often rises to retest the range bottom after breaking down below it.
- 2. Put a stop loss buy order safely within the broken trading range.
- 3. Place a take-profit buy order just above the measured move’s target exchange rate level.
While not as popular as technical analysis among those swing trading in forex pairs, breakout swing trading decisions can also be based on fundamental news events or on a supportive combination of fundamental and technical factors.
For example, a swing trader might anticipate increased volatility and a subsequent directional move in a currency pair after the release of an important news item that they expect will make the market break out of its present consolidation pattern.
Such news items that can significantly affect the currency market include central bank interest rate decisions, the release of key economic data, national elections, natural disasters and social unrest events.
Pros of Forex Swing Trading
Some of the advantages of swing trading the forex market include:
- Swing trading often requires less investment in terms of money and time than more active trading methods like day trading and scalping. The items needed to implement most swing trading strategies would typically include a computer, an Internet connection, a trading platform, a funded margin account with an online forex broker and some basic trading tools. These minimal requirements make getting involved in forex swing trading very cheap and easy.
- Another advantage swing traders enjoy is that because of the relatively long timeframes involved in a single swing trade that can stretch from days to weeks, swing traders do not need to remain glued to their computer screens all day long. Swing traders can even hold down a separate full-time job provided that they place stop-loss and take-profit orders to protect each position they take.
- Swing trading can be automated to a considerable extent in many cases. To develop a swing trading algorithm, you will need to have an objective way to size your positions and determine trade entry and exit points so that you can place suitable orders with your online forex broker.
- Swing traders can benefit from trending moves and counter-trend corrections, so they can often make more money by swing trading than by trend trading.
- Swing traders can also take advantage of the larger exchange rate movements you are more likely to see the longer you maintain a particular position. This aspect gives swing traders an advantage over day traders who need to close out positions each day.
Cons of Forex Swing Trading
Some of the disadvantages of swing trading the forex market include:
- Swing trading is slower, less exciting and more methodical than faster-paced strategies like day trading and scalping. While some traders might welcome this slower pace, other traders could find swing trading boring in comparison.
- Swing trading typically has a higher profit potential along with a higher risk potential than day trading or scalping. While your winning swing trades may show large profits, losing trades may also show magnified losses if your position goes against you.
- Rollover fees on swing trading positions held overnight can be substantial, depending on the currency pair involved. If you are positioned long in the currency with the lower interest rate, you’ll generally be subject to negative carry consisting of rollover fees computed from the difference between the prevailing Interbank deposit rates of the currencies you’re trading. If you go long the higher-interest-rate currency, then you might receive positive carry income instead.
- More patience is required to swing trade than to day trade or scalp the market since swing trades usually need time to come to fruition.
- A swing trade can tie up your trading capital for an extended period and prevent you from taking potentially profitable shorter-term positions.
- Since a swing trading position can be held for days or even weeks, market conditions can change while the position is open, possibly negating the original reason for entering into it.
- Swing traders routinely run the considerable risk of holding positions overnight when they cannot monitor them personally. They can mitigate this overnight risk on an outstanding position by placing orders to take profits and stop losses, but they cannot use their discretion to trade while they are asleep.
Helpful Tips for Swing Trading Forex
Before you start swing trading the forex market, it makes sense to do some preparatory work first. Here are some helpful tips that can get you started off on the right foot.
Develop and Backtest Your Swing Trading Plan
Trading profitably doesn’t happen right away in most cases. You’ll usually need to either develop a trading plan or use someone else’s trading approach. Once you’ve developed your own swing strategy, you can backtest it using historical data to determine if it would have been profitable. Don’t forget to check that current market conditions remain supportive.
Start Trading in a Demo Account Before Risking Your Funds
Most retail forex traders lose money because forex trading can be especially brutal to the unprepared. Practice implementing your swing trading plan in a demo account funded with virtual money for a comfortable period of time. This practice helps you develop confidence in your strategy before you fund a live account.
Stick to Your Trading Plan
Once you begin trading your plan, make an effort to stick to it in a disciplined manner so that your actual results stand a better chance of being similar to the favorable theoretical results you observed when backtesting the plan. If you find maintaining such discipline difficult, you might be able to fully automate your swing trading strategy so that you don’t sabotage its results.
Trade with Stop-Loss Orders
Even if you place your stop-loss substantially away from the prevailing forex market, always have one in place just in case a traumatic unforeseen international event like the infamous so-called “Swiss Shock” occurs, for example. Because of the extended timeframe during which many swing trading positions are held, swing traders have more exposure to unexpected world events and should take this added risk into account when positioning.
Mastering Forex Swing Trading Strategies
Those with the patience and the wherewithal to learn and put into practice what it takes to swing trade the forex market successfully could turn the possibility of a profitable trading career into a reality. To find out if swing trading forex is right for you, most online forex brokers offer free demo accounts funded with virtual money that simulate the forex market in real-time and let you trade without the obligation of making a cash deposit.
On the other hand, learning technical analysis and how to use it to anticipate future exchange rate movements so that you can start swing trading profitably may be too academically challenging or time-consuming for many would-be traders who might just be better off copying the trades of others.
Frequently Asked Questions
Is forex swing trading profitable?
Yes, swing trading can be a profitable forex trading strategy. Since most retail forex traders lose money, however, such profits are definitely not guaranteed.
Can you get rich by swing trading?
If you develop a consistently profitable forex swing trading strategy, then you can exploit it to enrich yourself. Doing that is much easier than it sounds, however, since most retail traders lose money not using proper risk management.
Is it safe to swing trade forex?
Swing trading forex strategically involves taking calculated risks with the goal of making a profit using the money that you deposit in your trading account as margin. Your capital committed to swing trading is generally put at risk of loss, although you can often mitigate losses by using stop-loss orders. Since swing trading in the forex market involves taking risks and running overnight positions, it is definitely not as safe as putting your money into a deposit account or a conservative investment.