Last Updated on 17 November, 2020 by Samuelsson

Swing Trading is a very popular form of trading since it does not require an extreme amount of time. With a good trading strategy, it might not take more than 20 minutes every day! Swing trades usually last between a few days to a few weeks and try to catch the larger swings in the market.

Swing trading has you utilize a lot of different indicators when researching market trends. Some of the trading indicators can be quite complex. In fact, it would be impossible for someone new to the markets to understand some of the trading indicators used by professional firms.

However, many of the most widely used trading indicators are incredibly basic in nature. In fact, the vast majority of trading indicators used by professionals are the ones that they learned during their first few weeks in trading.

According to us, some of the best swing trading indicators and methods are:

  • Moving Averages
  • Volume
  • RSI (Relative strength Index)
  • Support and Resistance

All these Swing trading indicators are widely recognized and used right, they will help you to become profitable in the market!

Understanding the Limitations of Swing Trading Indicators

Before we move on to the trading indicators themselves, it is important to understand what they represent. Trading indicators are not better than any other form of technical analysis, and should never be seen as the holy grail. It is not guaranteed that any trade that you make will yield profit just because a trading indicator signaled it.

Here are some other factors that can have an impact on whether you end up making a profit or taking a loss in swing trading:

  • Market Conditions can often dampen the effectiveness of indicators. Even if it seems like security is about to go up, a broad bearish sentiment could cause it to further plummet in value.
  • Your timing needs to be exact. Getting in at the right time can be imperative to make a huge profit.
  • What many people call intuition, is simply experience. Like all other things, you will become a better trader as you spend more time trading and pick up on subtle market signals.

Here are 4 trading indicators and some of their variants that you can use when swing trading with ease. When used properly, they should be enough to yield you a handsome return on your investment.

Don’t miss: Can you swing trade with a full time job?

Moving Averages

The moving average is one of the most basic trading indicators in swing trading. A moving average smoothens erratic short-term price movements and helps us better understand the trend and in what direction the security is moving. Moving Averages are good indicators on their own, but they are also used as a base for other, more descriptive indicators.

Remember that moving averages almost always lag behind the current price due to factoring in past data. The more data you factor in, the bigger the lag. Therefore, as a swing trader. it makes sense to combine short term moving averages with longer-term moving averages. Doing so, you factor in both the long and short term trend and have a more solid ground on which to base your decisions.

Moving averages with lengths around 100-200 are generally considered long term, 50-200 medium term, and 5-50 short term.

If you want to learn more about moving averages and how they can be used in trading, you should have a look at our massive post on moving averages!

Simple Moving Average vs. Exponential Moving Average

An SMA simply takes the mean of a set of data and then plots it on a graph. This means that all of the values carry equal weight in the calculation.

An EMA is weighted, with more recent data given a higher weighting factor. In other words, the EMA will adapt quickly to changes in price, with less lag.

In our experience, the exponential moving average tends to work best, but there are of course cases when the very opposite holds true as well. It all varies depending on the strategy and market.

Crossovers

When the short-term moving average crosses above a long-term moving average, the security is in an uptrend and a buy signal is generated. This is known as a crossover and is a popular way of using the moving average indicator.

Swing Trading Indicators (Best Indicators for Swing Traders)

Look at Microsoft’s chart above. Near the beginning of February 2019, the short-term MA (20-days) crosses over the longer-term MA (50-days). This is a bullish crossover that indicates an uptrend. As you can see, the stock has been in a constant upward spiral since then.

Of course, the reverse is also possible. If the short-term MA crosses over the long-term MA but in the other direction, then a downtrend might be in order. You can see this in the chart prior to the beginning of the uptrend.

Now to the not so fun part. While moving average crossovers are mentioned all the time on the internet, they do not work very well. A few decades ago, however, the situation was very different, and a swing trader who traded the moving average crossover strategy could make a lot of money!

Although the crossover has played out its role as a complete trading system, it indeed can work as a good filter. In several of our strategies, we filter out bad trades by requiring the short term average to be over or under the long term average.

Volume

The volume can be used to determine just how strong a trend is. A rise in price with increasing volume signals a stronger market than a rise in price with decreasing volume. This is because if the volume is increasing, that means more and more people believe in the trend. Conversely, if the volume is decreasing, then the belief in the rally is not really there.

In swing trading, the volume can be used with an indicator, or as a trading indicator in itself. Let’s have a look at how you can use volume in your swing trading!

Spotting Reversals Using Volume in Swing Trading

Whenever a market is on the rise, traders should be able to see strong and preferably rising volume as well. In order for the price to continue rising, there must be enough buyers that are ready to push prices higher!

In the simplest of words, a rise or fall in price with little volume is not that big a deal. However, a sharp increase or decrease in price, when coupled with a sharp increase in volume, does tend to be a big deal that can signal where the security might be heading.

Just before a trend reversal, there is usually a massive increase in volume as all the people who have been waiting to cash in on their positions move in at the same time and close their trades. This is a period of high volatility, which is then followed by a trend reversal.

Below are a few examples of volume spikes that precede a change in market direction:

Swing Trading Volume Indicator

Swing Trading Volume Indicator

 

Spotting Bullish Signs through Volume in Swing Trading

One pattern that some traders use is to look for a dip that occurs in a security’s price, followed by a rise and then a dip again. During the second dip, if the price does not fall as low as it did on the first dip and the volume has also shrunk, then this could be a bullish sign.

Here is an example of such a pattern. As you see, the pattern could be said to be a volume divergence.

Volume Divergence

Volume Divergence

The idea behind this pattern is that the downtrend is losing momentum and strength, which is apparent from that

  1.  The volume and with it the selling pressure is decreasing
  2.   The bears failed to push the price past the low of the last dip

 

Relative Strength Index (RSI)

This trading indicator is an oscillator that moves between 0 and 100. Usually, crossing 70 on the trading indicator generates overbought signals while falling below 30 on the trading indicator generates oversold signals. The typical interpretation of RSI is to buy once the indicator goes into oversold territory, and sell once it gets oversold, like below.

 

RSI in Swing Trading

RSI in Swing Trading

It is important to remember that overbought signals will almost certainly be generated whenever the security is in an uptrend. Similarly, oversold signals will be generated whenever the security is in a downtrend. It is up to the swing trader to determine the validity of the signals that he/she sees.

However, while most people think the RSI works best as a mean reversion indicator, from our experience it works also well as a momentum indicator!

Other Ways of Using RSI

While you can simply watch for overbought and oversold signals, there are other ways to use RSI as well.

As with the Volume that we covered before, a divergence can help to spot a potential turnaround in the market.

Spotting divergences with RSI is most reliable when the market has been trending for a long time. The divergence becomes a sign that the market is losing momentum and power, and is likely to turn around sometime soon.

Have a look at the chart below:

RSI Divergence

RSI Divergence

Here you see how the RSI indicator started its decline after a prolonged uptrend, while the price continued to climb. Soon, the divergence resulted in a turnaround of the trend.

The timeframe used for the RSI above is 14. This is the default timeframe that many swing traders use. However, in our experience, the best settings are found somewhere between 2-10.

The Relative Strength Index is a very versatile trading indicator that is bound to help you even after you have become an advanced trader. Studying the RSI properly and learning all of its intricacies can help you a lot.

Support and Resistance

Simply put, Support and Resistance levels are price levels that security has troubles exceeding. When a security’s price falls far enough to reach its support level, the increasing demand makes it hard for the price to drop any further. Similarly, when the price of a security rises far enough to reach its resistance level, the increasing supply makes it impossible for the security to gain any further.

Resistance Becoming Support

Resistance Becoming Support

In the image you see how the price broke the resistance, which then became a support level, that price retested successfully.

Remember that both the support and the resistance levels are purely theoretical values based on technical analysis. Usually, it takes a strong rally to break through a resistance level. At this point, the old resistance level often ends up becoming the new support level, like in the image below.

In swing trading, traders can use support and resistance to determine their entry or exit from a specific trade. For example, if a security has a support level of $100, you might want to open a long position when the price is close to that point.

Whole Numbers

Nice, well-rounded numbers often end up being the support or resistance of securities. This is because many institutional, as well as individual investors, set a selling price/stop-loss around those numbers.

For example, for rising security to break a resistance level,  all of the mutual fund’s open position needs to be filled before it is able to surpass the $100 price point if that was the resistance level. A mutual fund’s position in the stock could be extremely huge, and thus $100 could become the resistance level for the security because of this.

Using support and resistance as a trading indicator is very tricky. However, being able to determine these levels will be of immense benefit to you when swing trading. This is because you will be able to ride the trends while simultaneously having a decent idea of where the price will meet strong resistance.

In order to gain a better understanding of how support and resistance works, we recommend that you read our massive article on support and resistance!

Here you can find our archive with all our swing trading articles.

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