Last Updated on 10 February, 2024 by Trading System

Swing Trading indicators are a very popular form of indicators for trading since it does not require an extreme amount of time to utilize. 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.

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:

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.

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.

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:

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 trouble 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.

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!

Which indicator is best for swing trading?

 Luckily for beginners, some of the most accurate indicators for swing trading are the best indicators for swing mentioned above.  Even though several swing trading indicators abound, the best ones are some of the earliest indicators for swing trading you would learn in your trading journey. This is a plus because some of these best indicators for swing trading can be complex for beginners to learn. 

The best indicator for swing trading so far is the moving average. This indicator is very important because it helps us to be aware of the trends and to know what direction the security is moving. How does it do this? It does this by evening out short-term price movements.

In other news, you can also consider the effective use of trading strategies in addition to the best indicators for swing. Trading strategies are an important idea if you want to make so much profit. But this would depend heavily on the trading strategy you employ. The trading strategy that has a high win rate and reward/risk ratio promise the greatest reward among other strategies.

However, it is important to note that not all trading strategies would work in any market conditions. In the same way, not all strategies would give you the promise of a reward. Let’s see some popular trading strategies that have proven to be effective.

●   Mean reversion

This is a common strategy in swing trading. This strategy is based on the premise that the market makes bullish moves on both sides of the mean prices. Due to this, it then does everything possible to regain its position at the mean. But in doing this, the price escalates again and it goes back to trying to maintain its mean price.

Hence, the price continues to resonate around the mean price, creating an opportunity for traders to make a profit. Your luck comes if you can identify when the price is in an overbought or oversold condition and has a big probability of turning around. You can use RSI, moving averages, and Bollinger bands as indicators to determine when the price is in an overbought or oversold condition.

●   Price momentum

The whole purpose of this strategy is to enable you to trade in the way of the trend. This is of course immediately after the price makes a short-lived pullback. To be effective with this strategy, a simple hack is to be aware of when a pullback is about to stop for the next impulse to begin.

●   Price breakouts

A breakout strategy simply implies that you’re waiting for price(s) to escalate beyond a specified level in which it has declined in the past. When it thus surpasses that level, it shows that there’s big buying probability in the market. This also means that the price will continue to move higher in the future.

How Do You Identify Stocks for Swing Trading?

Swing trading comes with certain peculiarities, unlike day trading. In swing trading, you have to search for trends in stocks that take some time to manifest, unlike day traders that cannot stomach the risk to hold positions over 24hours. And while day traders are fixated on trading ranges of particular securities, swing traders care only about trends. This is due to the theory that when stock exit trading ranges they create new trends that can form new ranges that can stay for a long period.

Some of the factors that can help you identify the best stock to trade in include:

A good amount of Market Makers

Swing traders should trade in stocks that are held by a large number of market makers. Why is this so? This is because market makers drop signals for you to thread on. They also move large amounts of fund flows that can determine a stock’s momentum. This movement results in trends that you can recognize and trade on.

Trustworthy Information

Most swing traders trade in stocks that have a particular pattern of movement because they are regarded as more reliable. The same thing goes for a stock that is regularly reported on in several news outlets all through the trading hours. This is because of the assumption that any specific news in the media can throw a stock off its trading range and present a good entry point for a trade.

Least Daily Volume

One of the first things all swing traders should know is that they should only trade a liquid stock. The daily minimum you choose is not relevant. However, a reasonable example is 500,000 shares in a day. You are better able to exit high-volume stocks quickly because liquid stocks have lower bid-ask spreads.

What Is Considered A Swing Trader?

swing trading is a trading style where someone engages in a form of trading that produces short to medium-term gains in a stock over a very short period usually from few days to few weeks. It draws the line between day trading and position trading where traders close their trades daily, and after several months respectively.

Technical analysis (unlike day trading which uses market news) is generally used by swing traders to look for potential trading opportunities.  They scrutinize the price action and trend to make a decision.

Swing traders speculate where an asset’s price would move to and then they move in for a kill which in this case means that they try to capture any profit that surfaces from the move.

Once they do this, they move on to the next best thing. They are in the business of assessing trades on a risk/reward basis. When they examine the indicators of an asset they hope to enter, they place a stop loss and then they determine when they can exit with a profit.

Interestingly, swing trading is a lot more common than day trading. Therefore, you’ll find that it is considered to be a lot more convenient than day trading. For one, it requires less time to trade than day trading and traders can depend only on technical indicators to make their decisions.

On the downside, they tend to lose the rewards of longer-term trends. Their trade positions are also at the mercy of overnight market risk.

How Much Money Do You need to be a Swing Trader?

There’s not a minimum amount of money you require to swing trade. Generally, the amount of money you will need to get started on your swing trading journey depends on one thing. It depends on the strategies you put in place. The swing trading strategies affect the rate you risk per trade and your position.

Another thing you should know is that as a swing trader, you have the opportunity to trade on margin. You can have twice the amount of leverage that enables you to purchase twice the amount of money you deposited to buy a stock. For instance, if you deposit $5000, you can purchase up to $10,000 worth of stock.

However, you need anything from $5000 to $10,000 to effectively swing trade. This is of course if you want to factor in the risks accrued to any capital you deposit or trade with.

You should prepare to risk the barest minimum of $100 for any trade. If you risk less than this, your commissions can pose a big problem for you. This is because it could compound your loss or excessively deplete your profit.

 Any risk you’re prepared to take should fall within the narrow spectrum of 1% to 2% of the account for each trade. In a 1% risk, you require at least $10,000 if you’re going to meet the $100 mark because ( 0.01* 10,000 = $100.) likewise, in a 2% risk, you require at least $5000 to meet the $100 mark (0.02*5,000=$100)

Thanks for reading till the end. We believe that your deepened knowledge of these indicators will translate to more profitable trades. Go and conquer!

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

FAQ

How much time does swing trading with indicators require daily?

With a good trading strategy, swing trading can take as little as 20 minutes per day. This makes it suitable for individuals with busy schedules, including those with full-time jobs.

How do Moving Averages work in swing trading?

Moving Averages smooth out short-term price movements, helping traders understand trends. Combining short and long-term moving averages provides a solid foundation for decision-making in swing trading.

What is the significance of crossovers in swing trading with Moving Averages?

Crossovers, where a short-term moving average crosses above a long-term moving average, can signal uptrends and generate buy signals. However, it’s essential to note that while crossovers are discussed widely, they may not work as standalone trading systems.

How does Volume play a role in swing trading?

Volume indicates the strength of a trend. Rising prices with increasing volume suggest a strong market, while decreasing volume may indicate weakening belief in the trend. Volume can be used as an indicator itself or in conjunction with other indicators.

How is RSI used in swing trading?

RSI is an oscillator ranging from 0 to 100, with values above 70 indicating overbought conditions and values below 30 indicating oversold conditions. It can be used to identify potential entry and exit points, especially when combined with divergence analysis.