Swing trading in forex

1. What is Swing Trading?
2. Example of a Swing Trade: NZD/USD
3. How Do Swing Traders Identify Opportunities?
   
   

Forex trading doesn’t have to be limited to short-term trades. There is also a strategy with a multi-day horizon – swing trading. Let’s explore its principles and how it works.

What is swing trading?

Swing trading is a trading strategy focused on taking advantage of short-term price fluctuations within larger market trends. Traders look for opportunities with a timeframe ranging from a few days to weeks, which distinguishes them from day traders who close positions within a single day and from position traders who hold positions for months or years.

Key characteristics of swing trading:

• Timeframe: Medium-term (days to weeks)
  Method of identifying trades: Primarily technical analysis

• Essential knowledge: Technical indicators

Swing traders aim to profit from smaller moves within a longer trend. Even when the market is in a strong upward (bullish) or downward (bearish) trend, prices often experience short-term corrections. Swing trades take advantage of these deviations to enter and exit trades.

Example of swing trading

Let’s imagine that GBP/USD rises over the course of several months from 1.3245 to 1.3478. However, this move doesn’t look like a perfectly straight line – the market moves up and down, with active fluctuations in control.

Swing traders look for the start of these smaller moves (called swings) and enter positions that they hold until the market shows a reversal signal. Their goal is to profit from these short-term price fluctuations while the trend continues in the original direction.

Swing trading in forex

Swing trading in Forex can be very profitable.

Unlike major investors, swing traders are not concerned with the fundamental value of a currency. The goal is to take advantage of short-term price fluctuations – entering at temporary lows and exiting at trend peaks.

Forex offers ideal conditions for this, thanks to:

✔ High liquidity – allowing for easy entry and exit from trades
✔ Tight spreads – with trading hours
✔ Continuous trading – the market operates 24 hours a day during business days

These factors make swing trading an effective way to trade in the forex market.

Example of a Swing Trade: NZD/USD

Here is a graphical example of swing trading on the NZD/USD currency pair, where the overall trend represents the declining value of the New Zealand dollar, but the swing trade captures a temporary upward movement. This type of trade allows the trader to take advantage of moves against the main trend.

Such situations are common in swing trading, where short-term moves against the long-term trend are used to generate profit.

Downtrend: Indicates the main downtrend.

Swing up: Indicates a swing trade upwards – a temporary price rebound, which could be suitable for a short-term long trade.

Typical Strategy: Buy at the bottom of the rebound and exit at the temporary peak, before the price returns to the main trend.

Looking for consolidation

Take a closer look at the chart. The red arrow marks the point where the downtrend occurred. After a prolonged decline, you can notice that the price briefly stabilized before the swing rebound upward (green area).

This type of consolidation is a common indicator that traders watch for swing trading opportunities. We are not focused on the short-term movement of NZD/USD, but rather on the probability of an upward movement.

Therefore, the red arrow indicates a moment that could be considered an ideal point for buying NZD. This scenario is an example of "buying the dip," a strategy that traders use to profit from short-term price fluctuations.

Closing the trade

Initially, NZD/USD continued to decline, but then a rebound occurred upward, as shown by the green area. The price adjusted during this period, which allowed swing traders to extend their trades.

A trader who entered the market at the swing rebound zone (green area) and subsequently closed the trade at its higher point could have made a profit from the short-term movement.

This example highlights the importance of timing and discipline. If the trader had waited for further growth, they could have missed out on profits, as after the rebound, the price returned to the downtrend, which continued in the following days.
Therefore, it is crucial to trade with a clear plan and avoid emotional decisions. Past price movements do not guarantee future results, so managing risk properly and sticking to your trading plan is essential.

How do swing traders find opportunities?

Similar to scalping, swing traders often use technical indicators to determine optimal entry and exit points for trades. One of the main strategies is identifying support and resistance zones, which can signal potential price reversals.

We will explore this topic in more detail in the Technical Analysis course, but here we will introduce one of the most commonly used indicators in swing trading – the RSI (Relative Strength Index).

Below, you can see a chart of the EUR/USD currency pair, with the RSI indicator displayed underneath. Traders use this indicator to identify overbought and oversold areas – signals for entering or exiting the market.

RSI (Relative Strength Index) is a momentum oscillator that measures the speed and change of price movements. RSI values range from 0 to 100. Traditionally:

• If RSI crosses above 70, the market is considered overbought and a decline may follow.

• If RSI falls below 30, the market is oversold and a rebound is expected.

In the chart above, the purple line represents the RSI, and the 30-70 range marks a neutral zone, where the market is neither oversold nor overbought.

However, when RSI drops below 30 or rises above 70, green and red bodies appear, indicating suitable trading opportunities for swing traders. These moments are ideal for entering a trade, as they signal potential trend reversals.

Buying in an oversold market

Let’s look at the two green circles on the chart. The lower circle shows that the RSI dropped below 30, indicating that the market is oversold. At this moment, a buy trade is appropriate, as a significant rebound is likely, as predicted by the RSI.

Selling in an overbought market

Later, the market enters the overbought zone, which is shown by the blue circle. Opening a short trade at this point could yield a clean profit, as the market may then decline.

Although RSI provides valuable signals, it is not a tool that always guarantees profits. The red circle on the chart shows another dip into the overbought zone, but this time it didn’t result in the expected rebound, as the market continued in a bearish trend.

When trading, it's important to remember that even the best traders are not always right. The key to success is taking the time to make the right decisions and manage risk when a trade doesn’t go as expected.

Swing trading

Swing trading represents a medium-term strategy that lies between day trading and position trading.
Swing traders focus on smaller price movements within larger trends, attempting to take advantage of short-term fluctuations within the range of trends.

In swing trading, you can use various tools, such as the RSI (Relative Strength Index), to identify technical opportunities and optimize your trading decisions.