How does Swing Trading work in Forex? – Best Strategies & Indicators

Forex swing trading is a trading strategy that targets the medium-term price movements of the foreign exchange market. Swing traders focus on capturing price swings that can last from a few days to several weeks.

This strategy is different to other trading methods like scalping, which looks for smaller, quicker profits, or day trading, which sees all positions closed by the end of the trading day.

What is Forex Swing Trading?

Forex swing trading is a trading style focused on capturing medium-term price swings in the market. Swing traders aim to enter positions when the price is at a favorable pullback level (or after a breakout from consolidation).

The strategy best suits those who don’t want to have to monitor the markets constantly, but still want to benefit from significant price moves over a longer time horizon.

The primary goal of swing trading is to buy low and sell high (or sell high and buy low) within a given trend.

Swing traders tend to focus on the “swings” that occur when the market is either retracing within a trend or consolidating before a breakout. With swing trading:

• You’ll rely on signals generated from various indicators such as the MACD, the RSI, Volume Weighted Average Price (VWAP), and Fibonacci retracements to pinpoint entry points with higher probability outcomes.
• Swing traders (unlike short-term traders who frequently buy and sell throughout the day) aim to ride the wave of longer market trends.
• The best currency pairs for swing trading typically feature high volatility, liquidity, and substantial movement, providing swing traders with ample opportunities to profit.

How does Forex Swing Trading work?

Swing trading in forex involves analyzing market conditions so that you can identify protracted moments or periods where the price is likely to change direction.

Swing traders look for established trends, whether bullish or bearish, and wait for corrections or pullbacks within that trend, and once a reversal or continuation signal is identified, they enter the trade and aim to ride the price swing to its peak before exiting.

Indicators play an essential role in swing trading, helping you to spot entry points, potential trend changes, and targets (moving averages help smooth price data to identify trends, and the RSI gives a measure of how overbought or oversold a currency pair might be).

Price action traders also use support and resistance levels, trend lines, and candlestick patterns to spot price reversals that are ideal for entering trades.

Example of Swing Trading in Forex (with a calculation of profits)

Let’s walk through a real-life example of how a EUR/USD swing trade might work:

• Market trend: The EUR/USD has been in a bullish trend for the past few weeks.
• Entry point: After a pullback to the 1.2200 level, the RSI shows an oversold condition (below 30), signaling that the price might soon reverse and move back in the direction of the trend.
• Trade execution: You enter a buy position at 1.2200, anticipating a move back up to previous resistance levels.
• Target price: The target price is set at 1.2400, where you expect the price to reach before a potential reversal.
• Stop-loss: To manage risk, you’ll place a stop loss at 1.2150, 50 pips below the entry point, limiting potential losses if the market moves against you.

Profit Calculation:

• Price Move: The EUR/USD moves from 1.2200 to 1.2400, a 200-pip price move.
• Position Size: 10,000 units (1 micro lot).
• Profit per Pip: $0.10 (for 1 micro lot).
• Total Profit: 200 pips x $0.10 = $20.

In this example, you’d employ indicators like the RSI to identify an entry point and successfully capture a 200-pip price swing.

Step-by-step Tutorial of Forex Swing Trading

Let’s break down the process for executing a forex swing trade:

• Pick Broker
• Get your Trading Account
• Pick Currency Pair
• Wat for Setup

1. Pick a suitable Forex Broker

A crucial step in swing trading is selecting a reliable broker that offers tight spreads, reliable execution, and competitive fees. FP Markets, Vantage, and BlackBull are Forex Brokers known for their competitive conditions, especially for swing traders. Look for brokers that provide access to popular trading platforms like MetaTrader 4 (MT4) and MetaTrader 5 (MT5), which allow for easy execution of trades and offer various indicators to aid in technical analysis.

2. Get your Trading Account ready

After selecting your broker, you’ll need to open your trading account. Ensure that the account is suitable for swing trading, which typically involves higher position sizes and moderate leverage. For example, most swing traders use leverage in the range of 1:50 to 1:100, which helps maximize returns from price swings. Set your account settings to enable stop-loss orders and ensure you’re able to execute trades at the correct times.

3. Pick Currency Pairs for Swing Trading

When it comes to choosing the best currency pairs for scalping or swing trading, focus on those that show consistent movement and have high liquidity. Popular pairs for swing trading include:

• EUR/USD. The most liquid and widely traded pair, providing good trends and tight spreads.
• GBP/USD: This pair is volatile and offers potential for larger price moves, making it ideal for swing trading.
• USD/JPY: A stable pair with reliable trends, making it a solid choice for swing traders looking for consistent moves.

These pairs are well-suited for swing trading as they offer the liquidity needed for quick entries and exits and exhibit strong trend behavior.

4. Wait for a setup in your Strategy and start to Swing Trade

Once you’ve selected your pair and broker, the next step is to wait for a favorable setup. This involves analyzing indicators such as moving averages, RSI, and Fibonacci retracements. A classic setup might be entering a trade when the price hits a key support or resistance level and begins to show signs of reversal. Patience is key here—waiting for the right setup ensures better risk-to-reward ratios.

What are the Best Forex Swing Trading Strategies?

Swing traders often use a combination of strategies that help to identify high-probability trade setups.

To really understand profitable swing trading strategies in their detail, sign up for the WR Trading course, where we’ll explore the ins and outs of swing trading and more.

Here are some of the most popular strategies:

1. Trend following

Trend following strategies are one of the most widely used approaches in swing trading and indeed in many trading styles.

You’ll employ indicators like moving averages to spot strong market trends, and then wait for pullbacks or breakouts to enter trades.

By trading with the trend, you increase your chances of success－the trend is your friend.

2. Carry trades

A carry trade strategy involves borrowing a low-interest currency to fund the purchase of a high-interest currency.

This strategy allows you to benefit from the interest rate differential between the two currencies, and you can also profit from price movement (carry trades are typically medium to long-term trades).

3. Support and resistance Price Action trading

Support and resistance levels are crucial in swing trading, as you’ll look for price action setups where the price bounces off key levels of support or resistance, signaling a potential trend reversal.

Using indicators like the RSI or MACD can help confirm the strength of these price points, allowing for a well informed trade entry.

4. News Trading

News trading involves capitalizing on price movements caused by major economic news or events.

When news trading, you’ll follow key news releases, such as GDP reports or central bank interest rate decisions, to predict market reactions.

By combining signals from indicators like the MACD or Bollinger Bands with the news, you can create strong setups for swing trades.

What are the Best Indicators for Forex Swing Trading?

Effective indicators will help you make informed decisions, and here are some of the best indicators for forex swing trading:

• Moving averages. Moving averages, like the 50-period or 200-period MA, help identify long-term trends and potential price pullbacks.
• Relative Strength Index (RSI). The RSI will help you to spot overbought or oversold conditions that signal potential price reversals.
• VWAP (Volume Weighted Average Price). VWAP tracks average price by considering trading volume, giving you an idea of the market’s strength.
• MACD (Moving Average Convergence Divergence). The MACD is a momentum indicator that will help you spot changes in trend direction.

Using these indicators will help you obviate the inherent risks of swing trading (see below), and allow you to enter trades with the highest probability of success.

What are the Risks of Forex Swing Trading?

Swing trading involves several risks－the market can reverse unexpectedly, price swings can be simply unpredictable, and excessive use of leverage can amplify losses.

While forex swing trading can be a highly profitable strategy for those who prefer medium-term positions, it’s by no means risk-free, which is why it’s often seen today as a strategy of the pros.

Remember that the unpredictability of financial markets means that even experienced traders can encounter losses if risk management is not prioritized.

Here are the primary risks associated with forex swing trading:

• Market reversals and unforeseen price movements:One of the biggest risks in swing trading is the potential for the market to reverse unexpectedly. While swing traders typically aim to capture larger price movements over several days or weeks, these moves are often subject to sudden reversals or corrections (external factors such as geopolitical events, economic data releases, or central bank interventions can quickly shift market sentiment, causing significant price swings against your position). Managing your stop-loss and take-profit levels is key to mitigating losses.
• Price swings and volatility: Another inherent risk in swing trading is the unpredictability of price swings. While swing traders attempt to capitalize on medium-term trends, price movements in the forex market are not always linear (volatile periods can cause sharp, short-term price fluctuations that disrupt your intended direction, and even if your analysis indicates a clear trend, unforeseen market events can lead to erratic price swings－short-term volatility can temporarily undermine longer-term trends).
• Overexposure to leverage: Swing traders often use leverage to amplify profits, but excessive use of leverage can also significantly increase the potential for losses. While leverage allows you to control larger positions with a smaller amount of capital, making it a powerful tool when used correctly, the same leverage that can amplify profits can also magnify your losses when the market moves against your position－trading with high leverage without a clear and rigid risk management strategy is a common pitfall for many new swing traders.
• Overnight/over weekend holding: Swing trading typically involves holding positions overnight or for several days, which exposes you to additional risks. The forex market operates 24 hours a day during the week, but significant price changes can still occur during off-hours or when you’re not actively monitoring your position－holding positions overnight or through weekends leaves you exposed to market gaps (price changes that occur between the close of one trading day and the open of the next that can result in large, unexpected moves).
• Timing risks (incorrect entry or exit points): You’ll rely heavily on technical analysis to enter and exit trades as a swing trader, but poor timing can lead to entering or exiting positions too early or too late. This could result in missed profits or worse, losses if the market does not behave as expected.
• Economic and geopolitical risk: Forex markets are highly sensitive to macroeconomic and geopolitical events, which can cause quite dramatic price movements. In your position, you might not anticipate sudden news events, such as a central bank meeting, trade policy changes, or unexpected political instability, all of which can have a rapid and significant impact on currency prices.
• Liquidity risk: While the forex market certainly is known for its liquidity, there can still be periods, particularly with less commonly traded currency pairs, when liquidity dries up. This can result in price slippage, where orders are filled at different prices than expected, causing potential losses for you (swing traders are at particular risk when they hold positions during low liquidity periods, such as during market holidays or the last hours of trading on Friday).
• Emotional and psychological risks: Swing trading can also be psychologically taxing, especially during periods of drawdown (when your account balance declines due to losses). You might experience emotional stress when your trades are not going as planned, tempting you to abandon your strategy or make impulsive decisions, which in turn leads to overtrading, excessive risk-taking, or abandoning your trade prematurely.

What are the Benefits of Forex Swing Trading?

The main benefit of swing trading is the potential for larger profits compared to short-term trading methods like scalping or day trading.

You can capture big moves over several days or weeks while committing less time to monitoring the market, and medium-term market trends can offer substantial rewards.

Here are the primary benefits of swing trading:

• Potential for larger profits: Compared to short-term methods, one of the most significant benefits of swing trading is the potential for larger profits. Unlike scalping, which focuses on small price movements and often relies on frequent trading, swing trading aims to capture larger price swings that last days or weeks. These larger moves give you the opportunity to earn more significant profits with less frequent trades.
• Less time-intensive than day trading or scalping: Swing trading demands less screen time than day trading or scalping. While day traders must watch the market closely throughout the day to capture intraday price moves, swing traders usually spend less time monitoring their positions－you can enter trades and set stop-loss and take-profit levels, checking in periodically for adjustments.
• Lower stress and emotional impact: Swing trading is typically less stressful than more intense trading methods like scalping or day trading. The fast-paced nature of short-term trading can induce emotional stress due to the quick decision-making and constant need to react to market fluctuations. In contrast, you can make decisions with a longer time horizon as a swing trader, reducing the emotional intensity of trading.
• Utilization of technical and fundamental analysis: Swing traders often use a combination of technical analysis and fundamental analysis to make their trading decisions－the longer timeframes allow you to spot trends based on both market charts and economic news, which is a benefit that shorter-term trading strategies lack.
• Reduced impact of market noise: One of the challenges with short-term trading, especially scalping, is the constant market noise (small, erratic price movements that do not necessarily reflect the underlying market trend). Swing trading, however, focuses on longer price swings that filter out this noise, giving you a clearer picture of the broader market trend.
• Flexible trading hours: Swing trading provides more flexibility in terms of trading hours. While some forms of trading, such as day trading, require you to be present during the market’s peak hours to catch intraday price movements, swing traders have the advantage of trading across different sessions.
• Lower transaction costs: Because swing trading typically involves fewer trades than scalping or day trading, transaction costs can be lower. With scalping, traders often make dozens or even hundreds of trades a day, racking up significant spreads or commissions with each trade. On the other hand, swing traders usually enter fewer trades, thus minimizing their exposure to transaction fees－swing trading’s focus is on .fewer, more substantial trades rather than constant, small trades.

How much Leverage do you need for Forex Swing Trading?

Leverage in swing trading is typically moderate－a leverage ratio of 1:50 to 1:100 is commonly used, giving swing traders enough exposure to profit from price movements while maintaining manageable risk.

As your proficiency as a swing trader grows, it’s customary to increase the size of your leveraged positions, but the inherent risks of swing trading generally cap the leverage employed by newcomers and pros alike at a moderate level.

When should you not Swing Trade the Forex Markets?

Avoid swing trading during holidays or when volatility is low, as these periods dull the edges of indicators and give weak data that make it difficult to make well informed decisions. 

Tips on how to make Swing Trading in Forex more secure

• Employ your stop-loss: Always use a stop-loss to limit potential losses－lax stop-loss management can be a killer in swing trading.
• Diversify assets: You should diversify across multiple currency pairs to spread your risk.
• Stay updated: Stay up to date with economic news and trends, and factor news into a broad projection of how the market is,likely to react.

Forex Swing Trading vs Scalping

Swing trading deals with the same instruments as scalpers do, but the two approaches are dissimilar:

• Swing trading holds positions longer to capture larger price movements, making it ideal for traders with a longer-term view, and far more exposed to erratic price movements.
• Scalping targets small, quick profits, and is thus best suited for those who can monitor the market closely, make multiple trades throughout the day, and hone in on micro price movements rather than broader swings.

See our Forex Scalping Tutorial here.

Conclusion

Forex swing trading is a strategy that offers opportunities to profit from medium-term price movements, and by employing the right strategies and using indicators like moving averages, the RSI, and VWAP, you can enhance your chances of consistent success.

While swing trading requires patience, it offers the potential for significant returns for those who execute it well.

Swing trading has a veneer of simplicity, but risk management is crucial in this game, and strong technical analysis needs to inform your trade entries, and a religious stop-loss practice is mandatory.

Frequently Asked Questions on Forex Swing Trading