3 Important Forex Swing Trading Strategies that Can Work

17 July 2020

The Forex swing trading strategy essentially represents the midpoint between the day trading and long term trading methods. Its main purpose is to capture gains in a given currency pair over a period of several days to a number of weeks. This is a very useful trading style for traders who have full-time jobs since this does not require them to be in front of the screen for the whole day.

One famous working swing trading strategy is the use of the Bollinger bands. The upper and lower bands typically represent the significant resistance and support levels respectively, while at the same time when the price crosses the middle line it can be a major sign of upcoming trend change. Therefore traders can make use of the Bollinger bands to identify potential opportunities and earn some decent payouts.

Another useful swing strategy for Forex traders involves the use of Heiken Ashi charts. Since this trading style involves holding on to positions for several days or weeks, finding a trend is essential. Heiken Ashi charts make the drawing of trendlines much easier, compared to other diagrams, therefore traders can use them for this purpose.

Because of the limited time frame for this type of trades, many traders confine their research to only technical analysis. However, several successful professional Forex traders will also look at the fundamental analysis as well.

In fact, a famous full-time Forex trader and analyst John Kicklighter even came up with the ‘perception of the monetary policy’ charts, which basically ranks currencies by policies of their respective central banks. The main idea behind this is to buy currencies from the hawkish side of the spectrum against the more dovish ones from the other side.

FX Swing Trading Strategies

In this article, we will discuss 3 Forex swing trading strategies:

Bollinger bands trading strategy
Using Heiken Ashi candlesticks
Trading Economic announcements

We will now move on to each of those techniques and discuss them in more detail.

Bollinger bands trading strategy

One of the famous trading indicators which can help traders with forming strategies for Forex swing trading is the Bollinger bands. It is essentially composed of three lines. The middle one represents the simple moving average, the number of periods varies depending on the chart, however, the use of 20 days SMA is very common.

The middle line is accompanied by the upper and lower band, which are constructed according to the standard deviation. Consequently, when markets get more volatile the outer lines become wider. The opposite is also true if a given currency pair becomes less volatile, the bands become narrower.

If the price action consistently follows the upper band, then it is generally considered that the currency pair is in a strong uptrend. If on the other hand, the currency movement tracks the lower band, then it can be a sign of a downtrend.

The SMA line also plays an important role in the Bollinger bands analysis. If the price pierces the middle line, in most cases it is considered as a major sign for a reversal.

Finally, the lower and upper bands represent significant support and resistance levels respectively and sometimes can play an important role in the price action.

In order to illustrate how a trader can turn this into one of the working swing trading strategies, let us take a look at the GBP/USD daily candlestick chart with Bollinger bands indicator:

As we can see from the above, from late August to December 2019 the UK Pound was in a visible upward trend against the Japanese Yen. In fact, there were at least 3 periods when the price was closely following the upper Bollinger band. The pair did have at least 2 major pullbacks, however, it recovered and resumed the uptrend.

The situation changed considerably from December 2019. When the pair has consolidated for more than two months in a tight range between 141 to 144 levels. At the end of February, the price has pierced the 20-day simple moving average decisively, which marked the beginning of a downward trend. In less than a month, GBP/JPY has collapsed and fell just below the 125 mark. Interestingly, during this period the price was moving very closely with the lower band.

Obviously, this was a very strong move and those traders with short positions benefited from this and most likely have earned significant payouts. Eventually, the pair recovered and reclaimed some of its losses and settled near the 133 level.

So basically traders can use the outer Bollinger bands to identify the trend and also spot potential reversals if the price crosses the middle line. This does not always guarantee success, however, those techniques can help a trader to make the majority of his or her trades profitable.

Using Heiken Ashi Candlesticks

When it comes to analyzing and identifying the trend in a given currency pair, the Heiken Ashi candlestick charts can be a useful tool. It is similar to the traditional candle charts, however, it uses a formula that filters out the noise of daily market volatility and makes it visually easier to identify the latest trends.

To illustrate the advantages of this indicator, let us take a look at the typical EUR/JPY daily candlestick chart:

Swing strategy to trade Forex

Let us compare this to the EUR/JPY daily Heiken Ashi candlestick chart below:
Swing trading strategy for Forex

As we can see from those two charts EUR/JPY has been in the downtrend, in fact, one could argue that the price action was mostly confined within a descending channel. However, in the first chart, it is more difficult to identify those developments, in fact, for some beginners, this might be even confusing.

On the other hand, the trend analysis is much easier with the second, Heiken Ashi chart. Here we can see that as early as January 2020, EUR/JPY is in a descending channel. At one point, in March 2020, the pair tried to break out of this range, however, the move was swiftly rejected and consequently, the downtrend resumed. In fact, the pair is most likely to remain in a downtrend, until it manages to overcome the upper line of this channel.

Therefore, swing traders can make use of Heiken Ashi charts, analyze several currency pairs and choose to trade the ones where they can draw a clear trendline on the graph and open positions accordingly.

Trading Economic Announcements

As mentioned before, swing traders typically do not keep their positions open for more than several weeks. This leads some market participants and commentators to conclude that this style of trading can be conducted only by technical analysis and the fundamental analysis can simply be ignored.
Despite this perception, some experienced professional Forex traders do take fundamentals into account.

For example, John Kicklighter has introduced a new diagram that tries to simplify the fundamental analysis. Instead of listing every single economic indicator on the chart, like Gross Domestic Product, Consumer price index, nominal or real interest rates, he simply ranks the major currencies by the perception of monetary policy.

So how does this work? Essentially, Kicklighter takes currencies of central banks, which are cutting interest rates, extending Quantitative Easing, or more generally hinting at that possibility because of low inflation, weak economic growth, or any other reason and places them on the left side, in the ‘Dovish’ section.

On the other hand, he puts on the right-hand side, in the ‘hawkish section’, those currencies, which might be influenced by rate hikes, cuts in Quantitative Easing programs, have a Consumer Price Index, which is above the intended target or has strong economic growth.

Finally, Kicklighter places those currencies which do not fall into any of the above-mentioned categories into the middle section.

Obviously traders do not have to use his charts or try to design something similar, in order to trade successfully. However, what they can do is to analyze the latest economic announcements and try to buy those currencies of those countries, which have strong economic growth and where inflation is higher than the intended target and sell those currencies of those nations, where the opposite is the case.

Swing Strategies for Forex Trading - Key Takeaways

The Swing trading strategy for Forex might be a more convenient and less stressful option for those traders with full-time jobs and other important commitments. Unlike in day trading, this style involves trades with a timeframe ranging from several days to a number of weeks.
For many traders, especially for the beginners, Heiken Ashi charts are much simpler and easier for the purpose of trend detection. Consequently, those types of analysis can be easily combined with swing trading strategies for Forex.
In the short to medium term currencies that are controlled by more dovish policy-oriented central banks typically tend to depreciate against the ones controlled by more hawkish institutions. Therefore, traders can analyze the latest announcements and make predictions based on how the monetary authorities respond to the latest economic developments.

FAQ: Forex Swing Trading Strategies

What are some of the advantages and disadvantages of swing strategy to trade Forex?

There are several benefits to Forex trading with swing strategies. Unlike day trading, this method is quite compatible with any other regular full-time job, also a trader does not have to be in front of the screen for the whole day, has much fewer expenses on spreads and finally for most market participants, it is a less stressful option as well.

However, the Swing trading Forex style does have some disadvantages as well. Since the trading time frame can range from a few days to several weeks, the trader is exposed to overnight market risks. Also, an individual has to cover the rollover costs to the broker for holding trades open overnight. There are some specific positions for which a trader can get an interest payment from a broker. However, with today’s near-zero rate policies across the world, there are not that many options for this.

The rollover charge by brokers might represent a small fee, however, over the time those costs can add up and eventually could take up a significant portion of the potential payout.

Finally, in the process of trying to lock in short term gains, traders using a swing trading style might miss the long term moves and opportunities for earning even higher payouts.

How does the swing trading strategy for FX traders differ from scalping and long term trading methods?

The Scalping trading style differs from the swing strategy in two respects. Firstly, it usually involves trades with 1 to 15-minute timeframes. Also, traders using this method typically do not use stop-loss orders and prefer to open and close traders manually.

As for the differences with long term trading, there are essentially two differences. Firstly, this style of trading involves larger timeframes, which might range from several months to a number of quarters as well.

Also, it is worth noting that, that the Fundamental analysis plays a central role in any thorough long term analysis, factors such as relative real interest rates, the Purchasing Power Parity, and other economic indicators can have a major influence on the exchange rates. This might not always be the case with swing trades since they have a much shorter time frame.

What are some of the most common mistakes for those traders who use swing strategies to trade Forex?

Clearly the very common mistake of using very high leverage is not strictly confined to the one trading style. However, here it might be helpful to keep in mind that, since the swing trading involves keeping positions open for up to several weeks, this can be even more dangerous.

With this duration, currency pairs might move by 5, 10, or even in some cases by 20%. On the other hand, even with 50:1 leverage, it might only take a 2% change for the position to be wiped out. So this might be something helpful to keep in mind.

Also, many traders make a mistake of only using one technical indicator to analyze the charts and make decisions, while ignoring other tools. This can be very misleading and can easily lead to wrong conclusions and by extension to significant losses.

Finally, some swing traders do not have a commitment to devote regular hours to Forex trading. With this style, it does not have to be an entire day, for some market participants even an hour per day might be enough, however, it is consistency which matters the most. So if a trader ignores this and only opens a trading platform occasionally, from time to time, then he or she can miss significant market moves, which can lead to missed opportunities and severe losses.

In the Forex swing trading strategy, are some currency pairs potentially more profitable than others?

Generally speaking, the Forex swing trading techniques can be profitable with any currency pair. However, it might be useful to mention, that the currency pairs with higher average volatility are more likely to provide trader opportunities for earning a decent payout, than the other ones.

For example, a market participant might have a harder time making serious gains with EUR/CHF, which on average, according to the investing.com calculator, moves only by 53 pips per day, compared to GBP/NZD, which has an average 205 pip fluctuation per day.

Some other highly volatile currency pairs include EUR/NZD, EUR/AUD, EUR/CAD, GBP/AUD, GBP/CAD, and GBP/JPY.

Do the dovish policies of the central bank always lead to currency depreciation?

In the short to medium term, everything else being equal, such policies as cutting interest rates significantly and starting Quantitative Easing does very often lead to currency depreciation. One obvious example of this would be Euro, which has fallen considerably since 2014 after the European Central Bank made similar decisions.

However, this might not always be the case, especially, if the other major central banks are following the same policies. Quite recently, the US Federal Reserve cut rates back to 0 to 0.25% range, however, USD did not suffer much of a depreciation. One of the reasons for this could be that other central banks, like Bank of England, ECB, The Reserve Bank of Australia, and many others followed the same path.
The outcome of those policies can also be materially different in the long term. Central banks might implement easing policies, weakening their currency in the short term, but after some time the latter might bounce back and even appreciate because of the Purchasing Power Parity or other factors.

One example of this could be the Swiss Franc and Japanese Yen. Their central banks followed the policy of near-zero rates for decades. In fact, both of them have negative yields, JPY has -0.1% and CHF -0.75%. Logically, those measures should have weakened those two currencies tremendously.

Instead, we see that quite often they hold ground against their peers quite well. In fact, one can argue that both of those currencies are engaged in the long term an uptrend against the US dollar, Euro, Pound, and some other ones as well.