What are the Best Swing Trading Indicators?

Trading is an opportunity to make money by relying on your knowledge and analytical skills in all types of markets, including foreign exchange, stock, and crypto. In the age of information technology, all you need to make a profit through trading is a computer or a mobile gadget and the desire to make money.

Trading along the trend is considered one of the safest types of profit-making on the Forex market. It is because general market participants constitute the crowd, which very quickly crushes and throws out of the market those who go against it.

The trend line can be imagined as a river. Even a small river’s current is challenging, let alone an incredibly deep one. Going in the direction of the majority is the most profitable way to make a profit: you jump into the crowd, and it carries you to the right place without effort. The big question in all of this is when to jump into that river. Many different trend trading strategies provide the answer to this question. One of these trading strategies is swing trading.

In this article, we will answer the question of what swing trading is and what features it has. In addition to that, we will look at the advantages and disadvantages of this trading strategy, and finally, we will look at the 6 best swing trading indicators.

What is Swing Trading?

Sometimes it happens that by opening a position intraday, the trader gets into an emerging trend and watches the profit accumulate as it develops. In this case, at the end of the day, there is a picture that gives a high potential for trend continuation and indicates the advisability of moving the position through the night (when trading on the stock market). Traditional short-term trading methods (scalping and intraday) require mandatory closing of the position at the end of the trading session, which, on the one hand, minimizes the risk but also reduces the potential profit. However, swing trading is a trading style that combines intraday and overnight trades. Swing trading is something in between intraday trading and position trading.

Despite the fact that the concept of swing trading has recently been on everyone’s lips, it appeared quite a long time ago. This technique was described in the 1950s by J. Douglas Taylor in his book “The Taylor Trading Technique.” He considered the wave movement of the market, highlighting the daily cycles on it and dividing them into separate sections. Later his ideas were developed by Alan Farley and Jon Markman. Today, elements of this trading tactic are used by most traders. In this context, “swing” means the swing of the price movement, i.e., the purpose of swing trading deals is to take the price swing (range) of the dominant trend. However, a profitable position may be held for several days while the risk is quickly eliminated. Any trend consists of a phase of movements in its direction and correction phases. The swing trader tries to enter a position in the direction of the trend after the correction is completed at the moment when the impulse phase of the trend begins its development. The opposite trend line is usually taken as the target for the movement.

Thus, classic swing trading is based on technical analysis, and its basis is the understanding of graphical analysis and trading volume analysis. Also, swing traders use indicator analysis if necessary, and sometimes fundamental analysis as well (because news background and statistics can be the drivers that trigger the price impulse).

Features of Swing Trading

Based on the main goal of swing trading — a taking of a trend swing (and it can be realized in more than one day), a trader must have a strategy for making a decision on a trade, a system for setting movement targets, profit taking (possibly in parts), and he must also decide on the advisability of carrying a position through the night.

As for deciding to enter a position, it is necessary to understand the structure of the dominating and nested trend and work in the direction of the dominant trend when the corrective movement begins to “fade.” Trading volume, indicator divergences, as well as technical analysis figures indicating a trend reversal (change of a correction phase) are indicators of this. In swing trading, the trader observes both long-term (main) trends and short-term (correctional) ones, while the traded asset must be output in two frames or switch between higher and lower timeframes. In this case, it is advisable to make a deal at the moment when the price indicates the completion of the correction, which manifests itself either by the reversal figure of technical analysis at the end of the correctional phase or by the divergence of indicators, or the inflow of volume at the beginning of the primary trend impulse.

Then, being in a profitable position, the swing trader tries to make and keep profits by fixing parts of the position as the price approaches the extremes. Traders usually distinguish three phases of profit taking — by analogy with determining three impulse waves in a trend (though this is not a strict rule). When fixing the first part of the profit, traders transfer their stop order to the entry point, thereby leaving themselves at least a fixed amount of the profit. When the second part of the profit is fixed, the stop order is transferred to the zone of the first fixing. Thus, there is an accumulation of profit.

Now that you’ve learned what swing trading is and what features it has, it’s time to learn a few rules to follow when working in the market with this style of trading.

1. The swing trading strategy aims to open a small number of deals and keep them in the market for as long as possible. From the point of view of minimizing risk, it makes sense to close the deal at the first local reversal. But using a stop loss, it is possible to keep all transactions until the change in the trend direction, opening another trade at the local correction and ensuring it at the no-loss point.
2. Trading is done on long timeframes. The theory proposes to set a daily interval with a horizon to keep the transaction open for 2-4 candles. However, in this case, we should consider the swap costs. The alternatives are intervals H1 and H4 with a position holding for several hours during the day. Small intervals are not used because price noise adds unpredictability and imbalance to the model.
3. Trading is not performed at the moment of increased volatility or during a flat period. To make this decision, you need to understand if volatility is elevated or not. Open the volatility calculator on the Investing website and compare the amplitude of movement for the day with the average value.
4. Averaging and other similar methods of pulling loss-making trades are excluded.
5. It is necessary to close unprofitable transactions overnight. Your goal is maximum profits with minimum costs.
6. The bottom of the next pullback for a rising trend should be above the last low — a sign of continued movement. If the bottom is below the previous low, there is a high probability of a reversal.

Advantages and Disadvantages of Swing Trading

Swing trading is one trend-following tactic that involves opening trades in the direction of price movement at the bottom of local pullbacks. This trading model is interesting because with strict adherence to risk management rules, the number of losing trades relative to profitable ones is relatively small, and the strategy itself is understandable even to a novice trader. But like any other trading strategy, this strategy has its advantages and disadvantages.

• Advantages of Swing Trading

Here are a few of the main benefits you can get from swing trading.

1) Fees

In swing trading, there are fewer trading costs (broker and exchange fees) because there are fewer trades in a month than in day trading. And the impact of these costs on the result is lower because swing traders work with larger market movements than day traders. The costs take a smaller bite out of the income.

2) Versatility

More markets are suitable for swing trading than for intraday trading. For a market to be suitable for day trading, it must meet greater requirements for time-distributed intraday liquidity, the size of bid-ask spreads, sufficient volatility during trading hours of the day, and lower broker and exchange fees. This cuts off many markets that would be suitable for swing trading.

3) Time Lag

When it comes to swing trading, a swing trader has more time to weigh and make a decision than a day trader. The time lag eliminates some of the impulsive momentary actions that usually lead to losses.

4) Loss Protection

Due to broader price fluctuations and a more distant protective stop loss, swing trading uses less leverage than other types of trading or no leverage at all, and trading is done strictly on its own funds. Leverage-free trading dramatically reduces the risk of catastrophic loss from an individual trade under force majeure circumstances.

5) Emotional Stability

During swing trading due to less involvement in the price movements of the market and no need to assess the market and make decisions every 5 minutes, the psychological stress experienced by a swing trader is much less intense than that of a trader who uses other styles of trading in the markets.

• Disadvantages of Swing Trading

Despite the rather large list of strengths that this style of trading has, it also has a few weaknesses.

1) Long Wait

In swing trading, it takes longer to form a trading opportunity to enter the market than it does in intraday trading. Since you will be trading in a slower time frame, you need more patience. It can take days, sometimes weeks, before the right opportunities appear.

2) Gap Risk (when trading on the stock market)

Risk control is extremely important in order not to get into a big drawdown of the deposit. In swing trading, the trader moves the position overnight, and there is a risk of a price gap at the opening of the trading day or after the weekend due to unforeseen news events. When such a risk occurs, the market can open below your stop-loss price, and you will lose more money in the position than you originally anticipated.

3) Capital Requirements

In order to work with the trading method, it is necessary to have a sufficiently large capital. This is due to two reasons: firstly, the need to use less leverage, and secondly, the need to have some kind of “financial cushion” in order to keep the position open during market corrective movements.

4) Fluctuation Risk

As with any type of trading, trading based on price fluctuations can also entail large losses. Because swing traders hold trades longer than intraday traders, they also run the risk of serious losses, which are increased by holding trades every other day.

5) Missing Opportunities

Swing trade participants who prefer to engage in swing trading often enter the market at prices that are not the best. By monitoring the price chart once or twice a day, they are left to settle for the prices offered by the market at the time a trade is opened.

Top 6 Best Swing Trading Indicators

It’s time to examine the list of the best swing trading indicators below, which stand out for their simplicity and the effectiveness of their trading signals.

1) Relative Strength Index (RSI)

Among all the available indicators, the RSI swing trading indicator is one of the most important in the analysis. It is a momentum oscillator, and you can find it in the “Oscillators” category on your chart. It calculates the size and amplitude of recent price changes. Swing traders most often use RSI to determine overbought and oversold conditions.

The indicator is displayed as an oscillator, i.e., as a line graph, which moves between two highs and can range from 0 to 100. The RSI line rises when the number and size of bullish close increases and falls when the amplitude of losses increases.

The straightest RSI signal appears when the indicator breaks through 70 levels. This indicates an overbought level, which can be used to anticipate a reversal into an uptrend. If the RSI reaches a zone below the 30 levels, the market is oversold, which in turn means that the bear market will end soon.

2) Moving Average (MA)

Moving average (MA) — As the name says, this swing trading indicator counts the average price of assets over a given period. As a result, the MA smoothes out short-term volatility, which can confuse traders.

It is important to understand that the MA is an indicator based on past price changes. Therefore, it is more useful as a trading strategy indicator confirming the trend rather than predicting its future movements.

You can divide the MA into short-term, long term and medium-term, depending on what period of time it shows. For example, the short-term MA shows a period between 5 and 50, while the average MA reaches 100.

3) Moving Average Convergence-Divergence (MACD)

This is a more complex technical swing trading indicator, which combines two moving averages. The MACD is calculated by subtracting a period of 26 EMAs from a period of 12 EMAs, although these parameters can be adjusted to suit your needs. That said, the two lines displayed on the MACD chart do not represent the two MAs used for the calculations.

Swing traders usually buy when the MACD line crosses the signal line from above and short when the MACD crosses the signal line from below.

Another way to use the MACD is to look for differences between histograms and price movements, which usually indicate a trend reversal.

4) Volume

The volume swing trading indicator is one of the most critical for swing traders, so beginners usually ignore it. Typically, this indicator is shown under the main chart and indicates how reliable the newly formed trend is. Simply put, the volume indicator shows how many traders are buying or selling a cryptocurrency or asset at a given period. Thus, the higher the volume, the more powerful the trend.

5) Bollinger Bands

Bollinger Bands (BB) is a momentum indicator considered one of the best swing trading indicators. It consists of three lines: a moving average and two standard deviation lines of positive and negative. Swing traders love this indicator because it can quickly identify trends, overbought, oversold levels, and volatility. It looks simple and clean on the chart.

The width of the BB increases with volatility and decreases when the market calms down. The closer the bands are to each other, the lower the volatility.

6) Stochastic Oscillator

The Stochastic Indicator is another momentum swing trading indicator and works almost the same way as the RSI; the only difference is the calculation. The indicator compares the closing price of an asset to its price range over a given period.

Like the RSI, the Stochastic presents a chart between zero and 100. In this case, though, the overbought and oversold zones are above line 80 and below line 20, respectively.

Another difference is that it has two lines, not one like the RSI. One of the lines shows the Stochastic Volume at the moment, and the other shows the three-day MA.

Traders use the Stochastic indicator to determine overbought and oversold levels. They also look for intersecting lines, which generally means a trend reversal.

Conclusion

Using swing trading gives us a relatively safe income with little effort. Working on the trend without using complicated schemes or strategies, as well as the short duration of trades, helps us achieve success. On top of everything else, the swing trading strategy has a flexible system of analysis, which helps you to adapt your trading to your preferences as much as possible. Numerous swing trading indicators help to use signals for making profitable deals with maximum precision. However, it is worth mentioning that this trading method is not suitable for every beginner — only experience and understanding of the situation help to set up trading according to this method.