Many traders enjoy using techniques that can bring big profits in a single, pun-intended swing. This particular strategy refers to a system where you are looking for potential trend reversals and tries to capitalize on high-amplitude price movements and disregard short-term corrections which are inevitable when the price starts moving in a certain direction. An important focus for any retail traders attempting to use this strategy is picking the best technical indicators for swing trading and using a sophisticated strategy involving multiple signal generators.
Depending on your preferences regarding time frames and risk management, you may be interested in working with a strategy that either focuses on small but reliable gains or capitalizes on long-term trends that create substantial price movements. The selection of indicators will vary, but they are still largely the same.
Technical analysis for swing trading
The main goal of the strategy is to identify moments when the market is either oversold or overbought which is strong evidence that it is ready for a reversal, at least in the short term. An analyst uses a variety of commonly used techniques to find opportune moments for an entry. When working on short time frames (under H1), you can certainly rely on just one or two indicators to find more suitable moments for order placement.
When you are “hunting” for a bigger swing, multiple confirmations of a signal are preferable. It is important to use multiple swing trade indicators to ensure that you can find a reliable moment when a reversal is likely. Additionally, you can wait a couple of chart ticks before committing to placing an order. Showing patience is often a good idea when looking for a long-term market position.
It is not uncommon for a swing trader to have a position open for multiple days and even weeks if market circumstances favour such behaviour. When you are aiming at a larger profit, you should completely ignore price corrections and stick to your course. When using this technique, take-profit goals are often meaningless and manual liquidation of a position is required. Staying vigilant and continually tracking price changes is of high importance with such orders.
The same indicators that you use to find a good moment to enter the market should be used to identify a good opportunity to close a position at a maximum profit. A swing trader often liquidates a position and immediately opens another one in the opposite direction creating a very distinct trading pattern when you switch from one order to another and vice versa as soon as you see a potential reversal.
Does swing trading work?
This strategy is often employed by retail traders with low-risk tolerance and patience. With well-placed stop-loss orders, you won’t risk a lot when entering a market position, but finding a good moment to liquidate it is a completely different conversation. An accurate swing trading system is required. It is often built around using multiple analytical instruments and even multiple terminals.
For example, you can simultaneously track price dynamics in TradingView and MetaTrader4 using a large spectrum of analytical tools and the most accurate technical indicators. In terms of the best charts for swing trading, working on price charts with multiple graphical overlays (Fibonacci lines, support, and resistance levels) and within appropriate time frames is preferable, but you can always keep the screen clean if visual noise distracts you.
Which indicators are the best for swing trading?
There are multiple categories of indicators that you should use to correctly identify an opportune moment to place an order.
- Trend indicators are excellent at determining the strength of the current trend. Note that these are often used to predict reversals as well. One of the most obvious instruments from this category is the Moving Average which plots the smooth curve showing the average price across multiple chart ticks.
- Momentum is a very important metric that allows you to quickly gauge the strength of a trend regarding the numerical representation of overselling and overbuying within a certain period. The most popular technical indicator in the world (over 92% of retail traders use it) RSI is in this category.
- Volume is the last metric that should be carefully examined when looking for a potential reversal. When combined with RSI, it can identify moments when the asset is approaching a critical amount of operations in one direction predicting a reversal or a significant price correction that could be used for a swing trade in the short term.
These are some of the best indicators for swing trading. Now, we can finally talk about the best individual indicators that you should be paying attention to.
#1. Relative Strength Index (Momentum).
With over 92% of all MT4 retail traders using RSI, it is the most popular indicator right after moving averages. RSI is a momentum oscillator that provides valuable insights into the current situation in the market. The calculation is based on the amplitude of the price change and the total size of orders executed at the moment. The output is the indication of overselling or overbuying.
The line of the graph moves between two values – 0 and 100. The latter means that an asset is heavily overbought and that it will soon start going down in price. The former means the opposite. The general rule of thumb is to wait until the value rises above 70 and short an asset or wait until it drops below 30 and enters a long market position.
Depending on the asset type, you might need to make some adjustments to this rule and enter the market on other values. Check the price history and conduct a statistical analysis by identifying previous reversals and averaging values. In many cases, an optimal value will be slightly different than the recommended 70 and 30.
#2. Moving Average (Trend).
It is probably the oldest and still most commonly used indicator. Many traders do not even open a price chart without an MA. The indicator plots a line that shows a gradual change in the average price of an asset across multiple chart ticks. It is a good visual representation of a trend that smoothens the edges of a candle chart and simply shows you where the price is heading at the moment.
On its own, it is a simple instrument to simplify the visual interpretation of market data usually laid out as a row of candles. At the same time, the indicator is dependent on past data which is often irrelevant to the current market situation. It is a good tool to confirm a trend. However, multiple MAs with different settings can be very informative and helpful.
There are two types of averages: simple and exponential. While these two assign weight to various prices differently, many analysts believe that the distinction is mostly stylistic and that both simple and exponential types serve the same purpose without having a noticeable effect on the analytical process in general.
#3. MACD (trend).
One of the most powerful tools in your arsenal is MACD or Moving Average Convergence Divergence. It uses a combination of two different MAs and indicates when there is a potential for a reversal based on the strength of the current trend and its crossover with an MA plotted on a longer period. The calculation behind the indicator is the subtraction of the longer EMA from a short EMA. Again, you will need to play with numbers and pick the best combination of values to successfully identify trends.
There are three main components in this instrument:
- The MACD graph shows the result of the subtraction.
- The signal line moves sharply and indicates new trends.
- The histogram shows how these two lines diverge.
The rule of thumb here is to look for crossovers of a signal and a MACD line. If it breaches the resistance, it is a good moment to place a buy order and vice versa. Note that MACD should not be used without three moving averages with two having the same values as MACD and the third one having a longer period. You will be able to confirm a signal by looking at MAs crossing each other. Nevertheless, it is one of the best tools for swing trading strategies.
#4. Volume (self-explanatory).
This indicator is essential in the arsenal of a swing trader because it allows you to see when a signal generated by a momentum indicator is justified by trade volume. A single trade with a big price difference can cause a momentum indicator to start producing a signal, but without a large volume, the price correction will be swift and devastating. Looking at volume is a good way to gauge the mood of market participants and their tendency to switch the camp.
A reversal signal coupled with a large volume is a good predictor of a swing and can be used as a trigger for entering an appropriate market position.
#5. Stochastic (momentum).
Often used by advanced analysts and people who want to add more information to the graph alongside RSI, Stochastic is a tool that has a similar interface but approaches the calculation of its value quite differently by smoothing closing prices across a certain range and identifying the relationship between the general trend and the current overbuying and overselling in the market.
The graph contains two distinctly different lines with one showing the value of the average closing price and another plotting the value of a moving average with a much longer period. When these two lines cross, it means that the market is ready for a reversal. However, it is just another momentum indicator and should not be used without additional confirmation.
Using other graphical instruments
Two additional instruments can be very helpful when analyzing the graph. While they don’t carry any substantial insight, they can be quite good at isolating relevant sections of the price chart and simplifying the visual representation of the current price dynamic.
- Fibonacci lines are based on the mathematical principle that determines price retracement levels in percentile milestones plotted horizontally on the price chart allowing you to predict support and resistance levels. While there is no real substance behind the instrument, it is a way to estimate a price range within which you should make decisions about opening and closing orders.
- Support levels are widely used to identify the lowest possible value of the price at any given moment in the nearest future, resistance levels show the maximum possible value. These are also often unsubstantiated but can be quite helpful when trying to make a decision amidst general uncertainty.
Some tips for swing traders
The first and foremost advice is to forget about the question “What are the best indicators for swing trading?” In all honesty, it is a useless question to ask because each indicator has its upsides and downsides. You should focus on building a reliable strategy that relies on data from multiple sources and combines several metrics to generate a good signal that you can use to enter a proper market position without unnecessary second-guessing and hesitation.
Do not use only one indicator. It is a good idea to have momentum, trend, and volume indicator on one chart and have another chart with moving averages and graphical elements to compare data without falling victim to tunnel vision. Switching attention between these two charts will help you better see the big picture.
A good swing trading indicator generates signals with more reliability than others. It takes a lot of practice and experimentation to identify indicators that actually work and can collectively present you with a promising signal.
Pay attention to money and risk management when entering market positions, especially if you are using leverage. It is important to set up stop-loss orders even if you are 100% sure that you found a reversal! Make sure that you are prepared for the worst-case scenario.
Never close a market position too early. It is better to allow the price to go through a correction during a strong trend. Losing a small portion of potential profit is worse than missing out on an opportunity to catch a long-term trend.