Swing Trading for Forex Traders: What It Is, How It Works and More

Nov 5, 2021 11:22 AM ET
Swing Trading for Forex Traders: What It Is, How It Works and More

There are different types of traders in the currency exchange trade. Some prefer to open positions and let them run for weeks, months, or even years. Others never allow their positions to remain open overnight. There is a third type of trader who takes advantage of short-term spikes on the price chart for profit. These are called swing traders. They are not held back by time constraints like their fellow traders.

Who is a swing trader?

A swing trader is one who uses technical analysis to predict short-term price movements. Such price movements are called swings, hence the nomenclature. A swing may last for a few hours, a day, or even several weeks. Fundamental traders can also benefit from swing trading since they can take advantage of spikes on the price chart caused by major news releases. 

The bottom line is a swing trader does not concern themselves with a currency pair’s prevalent long-term trend. They only look for moments when trading momentum waned or rose, causing significant reversals which they can milk for profit. 

Perks of being a swing trader

There are no time limits

Other trading styles will have you either committed to a long-term play or restrained on how long you can leave your trade open. The latter can be seen with day traders, who have to close all their trades at the end of the day, irrespective of whether their targets were hit or not. Swing traders ride the wave, so to speak, giving them flexibility on how long they keep their trade open. In addition, swing traders are not limited to any one trading session or currency pair.  

Trading boundaries are well defined

Swing traders will mostly employ technical analysis. Because of this, they have well-defined entries and exits, as opposed to trading on instinct. Their signals are backed by indicators and chart patterns, which serve to improve their chances of success. 

Stop losses are smaller

When you’re swing trading, you are aiming at profiting from a short-term trend reversal. This compels you to place tighter stop losses around regions of support or resistance, just in case the reversal is fake. In the case where the trade lasts for longer periods, the tight stop loss makes for a much more favorable risk to reward ratio.    

Allows you to profit from both sides of market moves

As a swing trader, you may notice an emerging spike from a bearish trend. At this point, you may enter a long trade and exit it at the swing high. As the swing resumes its downtrend, you may also enter a short trade, enabling you to profit twice from the same swing.

Pitfalls of being a swing trader

The forex market does not operate over the weekends. From Friday to Monday, price charts will show a gap between Friday’s close and Monday’s open. If you were in the middle of a long swing trade by Friday’s close and on Monday, prices opened below your stop-loss, your stop-loss will not be triggered. This can lead you to untold losses. 

Swing traders take advantage of market volatility, which can be a double-edged sword. They do not necessarily trade in the direction of the trend, which in itself can pose a risk. Trading on spikes against the long-term trend may make them miss out on larger profits they would obtain by trading in line with the trend.  

Indicators for swing trading

Moving Average

Though they are best used with other indicators, Moving Average can be instrumental in pointing out entry and exit signals for a swing trader. Two Moving Averages are used, one of a shorter length than the other. The idea is to look for crossovers of the two MAs. A golden cross occurs when the shorter-term MA crosses above the longer-term MA, and it signifies an uptrend in the works. A death cross is the opposite – when the shorter-term Ma crosses below its longer-term counterpart.  

Death cross on a 4-hour GBPUSD chart.

In the example above, you can see the highlighted death cross when the red 25-period MA crossed below the 50-period MA in blue. This provided an opportunity for a short swing trade.

Relative Strength Index

The RSI is an oscillator that can predict trend reversals. Its scale runs from zero to 100. When it reads over 70, it signifies overbought conditions, which may point to a bearish reversal. When it reads under 30, it means the pair has been oversold, and its price is likely to reverse to the upside. 

RSI on a 4-hour EURUSD chart.

In the example above, RSI showed the pair was oversold on 5th February, which gave us the entry for a long trade. A few days later, on the 10th, RSI was overbought, which marked our exit. 

Support and resistance levels

Swing traders will sometimes utilize valid critical price areas to execute trades. In the chart above, for instance, we see prices consolidate for a while around a valid support level before embarking on an uptrend. This gave the entry for a long trade. 

Trading NZDUSD using support and resistance levels.

The take-profit level should be at the next valid line of resistance, which was hit a few days later. Prices broke past this level after a retest, which would have given the aggressive risk-taker even more profit.

Conclusion

Swing trading is an approach in which we take advantage of short-term price spikes known as swings. These spikes could last hours, days, or even weeks. Such traders do not consider the long-term trajectory of a pair’s price when trading. Most of them rely on technical analysis for their signals, though it is possible to swing trade using fundamental analysis. Suitable tools include Moving Average, RSI, as well as support and resistance.


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