Swing trading is like riding waves in the ocean. Instead of trying to catch the entire wave like long term investing, you focus on catching just a swing or leg. This means you're not in it for the long time you're looking to hop on, ride for a bit and then hop off before things change too much.
To do this effectively swing traders use technical indicators to identify those swings. These indicators are like signals that tell you when it's a good time to buy or when it's time to sell before it crashes.
There are lots of these indicators each giving different kinds of signals. Some might look at how fast a wave is moving while others might look at how big the swing is. By understanding these indicators you can better time your trades.
There are two swings that traders work on
Swing highs: Swing highs occur when the market reaches a peak before retracing, creating an opportunity for traders to consider short trades.
Swing lows: Swing lows happen when the market hits a low point and rebounds, providing an opportunity for traders for long trades.
When you sell high you aim to buy low to maximize profit. And when you buy low you aim to sell high for the same reason.
What is a swing trading indicator?
Swing traders use indicators to spot new chances in the market. They want to profit from the smaller movements between highs and lows. To do this, they use indicators to quickly identify new momentum.
There are two main opportunities they look for: trends and breakouts. Trends are longer-term movements with shorter ups and downs in between. Breakouts signal the start of a new trend.
Swing traders can use indicators on various markets, like forex, indices, and stocks.
Top 6 swing trading indicators
1. Moving averages
2. Volume
3. Ease of movement
4. Relative strength index (RSI)
5. Stochastic Oscillator
6. Support and Resistance
1. Moving averages
Moving Average is like a smoothed out line that shows the average price of a stock over a certain period like 10 days or 20 days. It helps traders see the general direction the stock is moving without getting distracted by daily ups and downs.
Since it looks back at past prices it's a bit slow to react to sudden changes. So, instead of telling you exactly when to buy or sell, it mainly helps you see the overall trend.
Swing traders pay attention to where these moving averages cross each other. When the short term MA crosses above the long term MA, it suggests the market might start going up. If the short term MA crosses below the long term MA, it might mean the market is turning down.
2. Volume
For swing traders volume is crucial because it shows how strong a new trend is. If a trend has a high volume it's likely to be stronger than one with low volume. More people buying or selling means there's a stronger reason behind the price movements.
Volume is especially useful when looking at breakouts. Breakouts usually happen after a time when the market is quiet. Then when the breakout starts the volume suddenly jumps up.
3. Ease of movement
Ease of Movement is a tool in technical analysis that looks at both price momentum and trading volume. It helps to see if the price is going up or down smoothly.
EOM indicator is shown on a chart with a line starting at zero. If the line goes up it means the price is going up easily. If it goes below zero it means the price is dropping smoothly.
If the price goes up and the EOM spikes but the trading volume doesn't increase, it suggests that the buyers might be losing strength and sellers could start taking control of the market.
4. Relative strength index
Relative Strength Index is like a gauge that measures how strong or weak a market is ranging from 0 to 100. There are two key levels above 70 is seen as overbought and below 30 is considered oversold.
When the RSI goes above 70 it means the market might be overvalued and due for a downward correction. Conversely, when it drops below 30 it suggests the market might be undervalued and could bounce back up.
Traders keep an eye on RSI, especially when the market has been trending strongly for a while. If they notice a divergence between the RSI and the market trend it could signal that the trend is losing steam and might reverse soon.
5. Stochastic Oscillator
Stochastic oscillator is another tool like RSI measuring momentum. But unlike RSI it has two lines one showing an average of recent prices over 3 days and another following the current price.
oscillator moves between zero and a 100 with areas above 80 and below 20 considered extremes. Above 80 suggests overbuying and below 20 suggests overselling.
6. Support and Resistance
Support and resistance lines act like boundaries for the price of an asset. They form a range within which the price moves. When the price breaks through these lines their roles can switch. In swing trading traders use these lines to decide when to enter or exit the market. A trader might buy when the price is near the support line.
Finding these support and resistance levels can be tough but they're really helpful for understanding how the market moves. Another strategy is to trade around whole numbers because many traders both big institutions and regular traders like to trade at those levels.
Conclusion
Swing trading is about making the most of smaller price changes within larger market trends. Traders use indicators like moving averages, volume, support and resistance levels, RSI and patterns to identify these opportunities. By monitoring these indicators traders can time their trades to enter and exit the market strategically aiming to maximize profits while still riding the overall trend.
