Swing trading forex

• What is swing trading?
• Swing trading forex example: NZD/USD
• How do swing traders find opportunities?

You don’t have to stick to the shortest timeframes when trading forex. Let’s take a look at an approach that has horizons over multiple days: swing trading.

What is swing trading?

Swing trading is a strategy that looks to profit from the oscillations that occur within wider market moves.

Swing traders will seek trading opportunities within a time frame that could be anything from a few days to several weeks. It is distinct from day trading, where the aim is to make a profit within a day. And it is also not a long-term play, like position trading, in which the trade can be left alone for months, or even years.

When swing trading, you’re aiming to profit from a small part of a longer trend within a given market. Even within strong bull or bear moves, most assets see substantial price action against the prevalent trend. Swing traders attempt to use that price action to earn a return.

Say that GBP/USD goes on a bull run from 1.3245 to 1.3478 over several quarters. On a chart, this move would almost never look like a straight line. Indeed, there may be days or even weeks of negative action as buyers and sellers vie for control.

Swing traders look to trade these smaller market moves. They’ll try to buy or sell a market at the beginning of a mini-trend (or swing) and keep their position open until it ends.

Swing trading forex example: NZD/USD

On the chart below, the general picture suggests a downward trend in the value of the New Zealand dollar. However, the swing trade depicted actually captures an upwards movement.

Source: FOREX.com

Look at the orange horizontal line. This represents what is known as a level of key support. Between late May and the middle of June, we can see that it was tested on three separate occasions but held up.

However, after a period of recovery, the New Zealand dollar plunged past the 0.649 level and continued to fall. It was at this point that the possibility of a swing trade loomed into play. By the time it reached 0.630, it was already trading at around 9% below where it was in March. In fact, NZD had not been worth as little as 63 cents in four years.

Looking for consolidation

Have another close look at the graph. Where the red arrow is, if you look hard you can see that having been in freefall for weeks the chart was consolidating at around that 0.630 level.

This is a common indicator traders will use to forecast a swing opportunity. Remember, we are not looking at the long-term value of a pair, but rather its potential to experience a quick price movement in the near future.

So, the red arrow indicates what, with the value of hindsight, would have been an advantageous moment to buy NZD. When you hear talk about “buying the dip”, this is exactly the type of situation a trader is seeking.

Closing the trade

Initially, NZD plunged even lower, but then rebounded sharply so that within a few days it was up close to 0.645 (where the green arrow is positioned). A trader who then closes their position somewhere around here, having bought somewhere around the red arrow, has successfully executed a swing trade.

Consider the importance of discipline here. A trader who wanted to hold their position and wait for an even bigger profit may have encountered problems: the line soon swung back down, eating into any potential profit. The 0.645 mark was not reclaimed until November, in fact. It’s very important not to be guided by emotions and remain clinical in all aspects of trade execution.

Please be aware that past performance is not indicative of future results.

How do swing traders find opportunities?

Like scalping, swing trading usually involves using technical indicators to decide when to enter and exit positions. A common technique we’ve used above is to identify areas of support and resistance, which typically see reversals in price direction.

We’ll cover this in more detail in the Technical analysis course, but here we can introduce a common technical tool used in swing trading: RSI.

Below is a EUR/USD chart with a Relative Strength Index (RSI) positioned directly beneath it.

Source: FOREX.com

RSI is a momentum oscillator that measures the speed and change of price movements. The RSI gauge oscillates between zero and 100. Traditionally, RSI is considered overbought when above 70 and oversold when below 30.

On the chart above, the purple band represents the 30-70 range, when a chart is neither overbought nor oversold. However, when it strays below 30 or above 70, the needle leaks into the white and this can be considered an opening for a swing trader.

Buying when a market is oversold

Let’s look at the two green circles now. The lower circle indicates a breakout below 30 on the RSI metric and suggests a market that might be oversold. It suggests a buy trade at this point and, sure enough, the RSI suggestion proves accurate as the market rebounds strongly at this point.

Selling when a market is overbought

But at some point, there will be another correction. On our chart above, the market enters overbought territory at the blue circle. By opening a short trade at this point, you could make a tidy profit.

However, RSI is not a tool that guarantees successful trading every time. The lower red circle represents another significant dip into the white. This time, it is not replicated with a rebound in a bearish trend on the graph above.

It’s important in trading to be aware that not even the best traders in the world will be right every time; the key to being trading profitably is to be right the majority of the time. And to manage your risk effectively when you’ve made the wrong call.

Swing trading takeaways

• Swing trading is a medium-term approach to the markets, in between day trading and position trading
• Swing traders look to profit from smaller moves within larger trends
• You can employ a range of technical tools when swing trading, including RSI