An Introduction To Swing Trading Indicators

We have already learnt about swing trading, where traders try to gain a bigger profit size of the market by planning trade following the trend. To plan a swing trade, traders rely on different strategies and market indicators. For a new investor, all these may seem quite complicated, especially swing trading indicators.

Trading indicators are mathematical calculations, plotted in trading charts to help traders identify trade signals in the market.  Swing traders use an array of trading indicators to identify trading opportunities on underlying assets. While experienced traders use advanced and sophisticated indicators, we will discuss some of the basic ones to help new investors begin with swing trading.

The fact is, most of the swing trading indicators are very basic. And, when we will discuss, you’ll realise how easy it is to identify and incorporate these indicators in your trading strategies. First, let’s list the indicators which we will discuss in this article.

– Moving Average

– Volume

– Relative Strength Index (RSI)

– Support and Resistance

– Ease of Movement

– Stochastic Oscillator

Swing trading is a process to benefit from small price movements within a short timeframe. And, like in day trading, swing traders try to benefit from both upswing and downswing. So, they target both swing highs and swing lows.

Swing highs: The moment when the market hits the highest peak before retracing, creating an opportunity for a short trade.

Swing lows: Marked by the moment when the price hits the low before bouncing off. Traders enter a long position while it happens.

Trading indicators are the technical tools used to identify new opportunities within short timeframes.  Traders use these indicators to identify trends and breakouts. Trends are long time market movements, and breakouts indicate the beginning of new trends, both important for swing traders.

6 Popular Swing Trading Indicators

Moving Average

Moving Average (MA) is a continuously adjusting average line of closing prices calculated over a period of time, say 10-days moving line or 20-days moving line. While doing so, the MA line erases daily noise of price fluctuation and presents traders with a direction.

MA is a lagging indicator, meaning it takes into account previous price actions during the calculation. It helps in establishing a trend, rather than indicating entry points.

Swing traders look for moving average crossover points where short-term MA crosses over long-term MA or otherwise, to predict a reversal in market momentum.  When the fast-moving MA crosses the slow-moving MA line from below it indicates a bullish reversal. Conversely, when fast-moving MA crosses the slow MA from above, it indicates that the market is taking a bearish turn.

Volume

An experienced trader will tell you that a trend reversal indication is false unless a change in volume accompanies it. We can’t stress enough how important volume is for swing traders. It is a straightforward enough indicator to establish a change in momentum. High volume will indicate the presence of real buyers and sellers in the market.

How to use volume as a trend indicator?

The rule of thumb suggests that when the asset price is rising in the bullish market, there should also be a rise in volume, indicating the presence of real buyers. Price change without a change in volume isn’t real trend change. Usually, the market sees a spike in volume before the trend reversal.

Traders use volume divergence to spot a bullish trend, which simply means looking for price dip against volume. Traders look for two consecutive price dips when the second price dip is weaker than the first one accompanied by a lower rise in volume. It denotes weakening bearish momentum, as seller fail to push the price below the first dip.

Relative Strength Index (RSI)

Relative strength index is a price oscillator that moves between the range of 0 and 100 with two limits drawn at 30 and 70 percent. The area above 70 percent creates the overbought area and below the 30 percent line, the asset is considered oversold, helping traders to visualise market movement.

Traders try to consider RSI with divergence, especially when the market is trending for a long time. It suggests a weakening of the current trend and a potential reversal.

Support and Resistance

Support and resistance lines create a price band between which the asset price moves. The two lines change their roles when the price line makes a breakthrough. In swing trading, traders use these two lines to plan entry and exit in the market, such as a trader may open a long position when the price close near the support line.

Identifying support and resistance levels can be tricky, but they are of great help to understand the market movement. Another trick is to trade around the integers because most institutional, as well as individual traders, prefer to trade around those numbers.

Ease of Movement (EOM)

The ease of movement is a technical analysis that combines price momentum with volume to correlate the two strongly. It is used to determine if the price is rising or falling with ease. The concept is if the price is moving with ease, it will continue to do so for a time where trades can be planned.

The EOM indicator is plotted against a baseline set at zero. If the EOM moves upward, it means the price is moving up with ease, and likewise, when it moves below zero, the price is falling with ease.

A price rise accompanied by a spike in EOM, but not by a rise in volume indicates that bullish forces are weakening and sellers are taking over the market.

Stochastic Oscillator

The stochastic oscillator is a momentum oscillator like RSI. But unlike RSI, it comprises two lines, one moving average line, usually 3-days average, and the current price line. The Stochastic oscillator also undulates between zero and hundred, with overbought and oversold regions being set above 80 and below 20.

Moving Average Convergence Divergence (MACD)

MACD is a measurement of how fast price changes, that is increases or decreases.  It compares two moving average lines, usually a short one and a medium-term one to measure price movements. The most common formula is to subtract the 26-days EMA from 12-days EMA.  Traders typically use MACD to confirm the continuation of a trend. So, when there is a pullback in the market, confirmed by a fall in price accompanied by a low volume and volatility, the MACD shouldn’t register a new low.

Limitations Of Using Swing Trading Indicators

Swing trading indicators are attractive to use. However, new users must also keep in mind not to trust these blindly. While you are making use of them, also keep the following limitations in mind.

– While you trust indicators, don’t ignore the market. Often market movement can lower the effectiveness of an indicator.

– Swing traders don’t follow the market daily. But that doesn’t mean that you shouldn’t follow the trends. For swing trading, your timing needs to be exact.

– Perfection comes with experience. An experienced trader will identify small changes with ease. You too can reach there as you start spending more time in the market.

– Apart from indicators, swing traders also consider several patterns like Flag, Wedge, Triangle, Pennant, Head and Shoulders, and more to predict trends.

The essence of the discussion

Swing trading indicators are great to form trading preferences. They help in identifying and predicting price movements in a short time frame that swing traders aim at for profit-making deals.

Apart from the indicators we have consolidated here, there are others as well. Traders have their preferences in using indicators. Which one will work for you? That you will find out with time form your trading strategy.