4 Powerful Swing Trading Indicators

Swing trading, while often described as being time period you trade or hold a position.  A better way to understand swing trades is taking part in one clean swing in the market.  To do so, many traders rely on trading indicators to find opportunities to get involved in an instrument.

Using technical indicators for swing trading is fine, but a trader should have some knowledge of price action and price patterns.  Nothing beats being able to read the market in real time.

What Is Swing Trading And How Does It Work

If you day trade, you know that you are often prone to news events and a slip of the tongue from a politician that can send markets falling.  Day trading can be a hectic way to make a living.

Swing traders aren’t as affected by the minor hiccups in price.  While not a prerequisite, many swing traders will trade daily charts and come in after the market closes.  During this time, they can scan for setups that fit their trading criteria.

Essentially, within a larger trend in the market, there are smaller moves in both directions.  Swing traders, depending on their trading approach, will look for either a reversal or continuation movement in price.

There are many who believe that swing trading is time frame dependent.  Unlike their conclusion, I look at swing trading as, essentially, trading a swing.

swing trading indicators

With a reversal, swing traders will look for a pullback in price.  At some point, the pullback will end and price will reverse.  Traders will look to enter a trade in the direction of the reversal.  Some traders will use the longer trend structure direction while others will use what price action on the short term trend points to – a long or a short.

By being open to trading both directions, traders can have twice the opportunities to trade.

Swing traders that look for continuations, are looking for a pause in the current direction.  Once price breaks from the pause and continues to move, a swing trader will look for a position.

Once in a position, price is allowed to advance until either a profit target is hit, or momentum starts to reverse.

If there is adverse price action, swing traders will exit their positions as their original trade signal isn’t working out.

What Is A Swing Trading Indicator?

Indicators come in a three categories:  Momentum, trend, and volume.  All swing indicators will use either the price of the instrument and/or the volume of trading activity in the calculation.

As indicated by the categories:

Momentum indicators:  Designed to show how strong price movement is.  Can also be used to trade divergence and to measure overextension in a market.  The most common momentum indicators are the RSI and MACD

Trend indicators:  These show the general direction of price, including lack of direction and are generally moving averages.  These smooth out the price bar information on the chart and display it as a moving line on your chart.  Moving averages are the most popular as are properly drawn trend lines.  Traders will generally use exponential moving averages.  The EMA will give more weight to the most current price making it react faster than the SMA (simple moving average) to price.

Volume indicators:  Shows the amount of buying or selling taking place at a moment in time on the chart.

Traders will design a trading strategy using none to all of these indicators to help determine the time to buy or sell.  As mentioned, a knowledge of price action and the ability to read a chart is vital for a trader.

Best Indicators For Swing Trading

What I find to be the best may be different than what others suggest. The truth is, we are all right.

If an indicator presents information for you that leads to successful trading, then it is the best, for you.

I will present my opinion based on experience. Although my primary chart is the daily chart, these swing indicators can be used on any time frame and for position trading as well.

As my own trading evolved, I changed indicators and eventually got rid of most of them.  From the best indicator list, you can design your own swing trading strategy and keep in mind, complex is not better than simple.

Use what you need, discard the rest.

Indicator #1.  Moving Average

There are many different averages you can use including simple moving averages, Hull moving average, weighted moving averages.  All have a different calculation but they need the one thing you can see on your chart, price bars.

There is also the rabbit hole of different lengths.  The most popular are the 10 and 20 period averages and you can use the EMA or SMA formula.  My money has always been on the 20 period exponential moving average.

moving average

To determine the trend, we don’t need to rely on crosses of multiple moving averages.  Looking at this chart, the only question you need to ask is, “what side of the moving average is price generally on?”  If you wait for a cross of price on the average, the slope of the average, or a moving average crossover, you will learn why they call these “lagging indictors”.

From this 20 EMA, we can see a few things.  When price pulls away from the average, we determine the volatility has picked up.  Depending on price action, we may see an exhaustion and a short trade potential.  We could also see price pull back to an area around the moving average where a trader can look for a reversal back in the direction of the trend.

With an understanding of reversal chart patterns, traders could buy around the lows of the pullback.  With an understanding of volatility as seen on the left, traders could sell around the high of the move.  You won’t get the exact bottom or top of the swings but the meat in the middle is a good path to profits.

Indicator #2.  MACD

The MACD (moving average convergence divergence) is a momentum indicator that uses moving averages to determine momentum.  While the standard MACD settings are 12,26,9, I prefer the 3,10,16 settings otherwise known as the 3-10 Oscillator.

With the MACD 3 10 settings, traders can use the fast line as a read on momentum and the slower line as a general trend direction.  With the swings of the fast line, we can also determine if divergence is taking place on the chart.

macd

I have marked the divergence with the letter “D”.  Price makes a lower swing low while the indicator puts in a higher low.  Swing traders would look for a price action led trade entry to enter a long position.

The red lines show how momentum is used.  The MACD fast line puts in a high which is higher than the recent swing highs on the indicator.  This shows that there is momentum to the upside.  Swing traders would consider that a strong leg up and look to take advantage of a further move to the upside.

In our example, price has consolidated at the highs of the momentum move.  Swing traders would be looking for a move to the upside from this tight trading range.

Using divergence and the fast line momentum swing is a good approach to this indicator.  I never used the crossing of the lines as an indication of anything.

Indicator #3.  Bollinger Bands

The Bollinger Bands will show the volatility and momentum in the market.  This is a popular trading indictor and it does have merit depending on how you use it.

Using three lines, the BB uses a standard deviation (2) calculation from the middle moving average, usually 20 periods.

The upper and lower band will contract and expand depending on the volatility of the market.

bollinger bands

There are different ways to use the Bollinger Bands as a swing trading indicator.  A good use for any technical indicator that uses bands or channels is to look for price to engage with the bands.

With this chart, whenever price pierced the upper or lower band, we would look for a pullback to around the mid line.  The issue becomes when volatility compression comes into the instrument.

Once the bands shrink and stay in the condition, a pullback no longer becomes viable as there is no price swing to exploit.

Swing traders would want to consider the formation of a trading range.  Playing a breakout of the range for one clean swing would be the goal.

The effect where the bands balloon apart is one reason I prefer Keltner Channels that use an ATR over using these bands.  Some traders like this balloon effect as, to them, it tells them information about the market.

I personally find it distracting.

Indicator #4.  Price Patterns

While not an indicator in the traditional sense, price patterns do indicate certain conditions in the market.  I suggest you spend time with this section.

There are many chart patterns available for a swing trader to use with many different names.  I don’t concern myself with the textbook definition of the pattern and consider most of them of a consolidation in price.

Patterns look great in textbooks but reading them on the chart is a different story.  To keep it simple, look for a pause in the advance or decline of price, connect the highs and lows of price action, and look for a break for a trading opportunity.

price action indicator

Notice I just have the 20 EMA to help frame the market trend.  Can you build a swing trading strategy this simple?

Yes, you can.

You need to break down what your trading process will be from finding setups to managing risk.

See the black arrow?  Do you need a momentum indicator to tell you something has changed? Probably not.

Learning to decipher price action clues is a worthwhile skill to learn.

Conclusion

With only a few swing trading indicators, you can define a trading strategy for any instrument.  Your selection will depend on your beliefs about the market.

My approach is to look for a momentum move in the market and then to get into the next swing if there is one.

If you go back to section four on the list, that is a fairly good representation of my personal approach.

One of the great things when considering swing trading as taking one clean swing, is momentum can help manage risk.

When a swing trader sees momentum coming out of the current move, reducing risk by moving the protective stop loss helps avoid a full 1R loss.

Design A Strategy

While I could have broken all this down into a working strategy, there would have been little benefit.  There are enough tips in this article about what to look for and how to use these indicators.

Your next step is to piece the parts together and ensure you cover risk protocols.

Feel free to go through our entire blog.  There are too many articles to list that can get you on the path to designing a swing strategy for yourself.



Author: CoachShane
Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

1 Comment

  • Silverio Barroqueiro

    Dear Shane,
    Great presentation of a lesson for beginners and those traders who have been net losers for quite some time. It is so well-written and your explanations so clear and persuasive, that I shall keep the URL for this web page in my wallet to give to those who ask me what is a “swing trader” and what exactly do I do for a living?

    Sam Barroqueiro, CFM
    (Retired Stockbroker from Merril Lynch, E.F. Hutton, and Shearson Lehman Brothers)

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