The 5 best indicators for swing trading

Having problems identifying swing trades? Explore the 5 best indicators for swing trading and learn how to use them to identify trends, entry points, and exits with greater precision.

Swing trading focuses on making a profit in a matter of days or weeks, using technical analysis indicators to strategically mark possible entry and exit points. Selecting the best swing trading indicators can greatly increase the chances of gaining profits from successful trades. In this article, we list five of the best indicators for swing trading to assist swing traders in the markets.

Content

1. Introduction to swing trading indicators
2. Moving averages (MA)
3. Moving average convergence divergence (MACD)
4. Relative strength index (RSI)
5. Bollinger Bands
6. Stochastic oscillator
7. Combining swing trading indicators for better results
8. Mastering swing trading with key indicators
9. Final thoughts

Introduction to swing trading indicators

What is swing trading?

​Swing trading involves capturing value from a trading asset over a period of days or weeks, depending on the price movements. Unlike day trading, where buying and selling happen in a single day, swing trading focuses on profiting within longer timeframes.

Key objectives of swing trading

• Making profits from mid-term price movements: Swing traders operate according to trends, moving their positions to maximize profit based on pre-determined entry and exit positions. Traders aim to profit from both short and medium-term price shifts. 

The role of indicators in swing trading

• Swing trading with an emphasis on technical analysis: Price analysis is critical for traders involved in swing trading because it enables them to monitor market changes and assess whether a given price stage is likely to change.
• Swing trading for improved efficiency: Swing trading benefits from using indicators. These present objective data regarding price changes, trading volume, and overall market activity.

Types of indicators

• Trend indicators: Identify the overall market direction using key indicators such as moving averages.
• Momentum indicators: Show how fast price changes occur over time, as with the relative strength index.
• Volume indicators: Gauges the strength of price changes relative to trading volume, such as on-balance volume.

1. Moving averages (MA)

How Moving averages work in swing trading

Simple Moving Average (SMA) vs. Exponential Moving Average (EMA):

• SMA: Calculates the price average over a specific period of time, giving a similar weight to all the data points.​
• EMA: An Exponential Moving Average gives more weight to recent prices, making it more responsive to new information.

Identifying trends with short-term and long-term MAs: A short-term MA (such as a 20-day MA) helps traders determine immediate trends, while long-term ones (like 50-day or 200-day) help discern overall market direction.

Practical application of moving averages

When short-term MAs cross above a long-term MA, we have a bullish market (a golden cross). The opposite is true when the market is bearish (a death cross), and the short-term MA drops below the long-term MA.

Using moving averages to identify support and resistance levels: MAs can also act as changing support or resistance levels, where the prices tend to find support during upward trends or act as resistance during downtrends.

Noticing and applying moving averages can help traders become more skilled at pinpointing the perfect trading deals while simultaneously managing risk. 

2. Moving Average Convergence Divergence (MACD)

Understanding the MACD Indicator

MACD lines and signal lines

• MACD line: Represents the difference between the 12-day and 26-day exponential moving averages of a security's price. ​ 
• Signal line: A nine-day EMA of the MACD line, serving as a trigger for buy or sell signals. 

Histogram and its significance

Histograms show the difference between the MACD line and the signal line. If the histogram indicates a positive value, it suggests bearish strength, whereas a negative value indicates bullish strength.​

How to use MACD in swing trading

Identifying bullish and bearish crossovers

• Bullish crossover: This crossover suggests a price increase. This movement occurs when the MACD line is above the signal line.
• Bearish crossover: On the contrary, this crossover depicts a price decrease. You spot this movement when the MACD line is below the signal line.

Using MACD divergence to predict reversals

• Bullish divergence: This signals an upcoming bullish reversal, in which the price makes lower lows, but the MACD line forms higher lows. 
• Bearish divergence: This indicates an impending bearish reversal where the price makes higher highs, but the MACD line forms lower highs.

3. Relative Strength Index (RSI)

What the RSI measures

Definition of the RSI as a momentum indicator:

The relative strength index is a momentum oscillator that ranges between 0 and 100 and measures the speed and change in price movements. 

Overbought vs. oversold conditions 

• Overbought: When the RSI reading exceeds 70, an asset is deemed too expensive and likely to undergo a correction. 
• Oversold: When the RSI reading drops below 30, an asset is considered undervalued and likely to rebound. 

Swing trading strategies with RSI

Trading reversal points using RSI: Traders who leverage RSI focus on the extreme lows of 30 and highs of 70, with the expectation that the price trend will reverse.

Strengthening exit and entry signals using RSI with other indicators: With the inclusion of other technical tools, such as moving averages or MACD, RSI improves the quality of trading signals and decision-making.

Using the RSI together with MACD indicators may assist swing traders in identifying trend reversals to make more informed decisions while trading.

4. Bollinger Bands

The basics of Bollinger Bands

Middle band and outer bands (standard deviations)

Bollinger Bands consist of three lines:​

• Middle band: A simple moving average, generally set to 20 periods.​
• Upper and lower bands: Two standard deviations placed above and below the middle band. These bands adjust to volatility in the markets. 

Bollinger Band squeeze and breakout signals

A "squeeze" occurs when the bands contract due to decreased volatility, often preceding significant price movements. A subsequent "breakout" happens when the price moves beyond the bands, signaling potential trading opportunities. ​

Using Bollinger Bands for volatility analysis

Identifying overbought and oversold conditions

When prices touch or exceed the upper band, assets may be overbought. Conversely, touching or falling below the lower band suggests oversold conditions. ​

How to use band width for trend analysis

The distance between the upper and lower bands shows the market's volatility. Contractions indicate low volatility and possible trend reversal, while expanding bands indicate high volatility and a trend continuation. Swing traders can easily determine market volatility with the help of Bollinger Bands before planning precise entry and exit positions.

5. Stochastic Oscillator

How the Stochastic Oscillator works

Stochastic line and market momentum

Stochastic oscillators measure the momentum indicators and compare a security’s closing price with its lowest and highest prices over a specific period of time, usually 14 time periods. It consists of two lines:​

• %K Line: Reflects the current closing price relative to the specified range.​
• %D Line: A moving average of the %K line, serving as a signal line.​

This oscillator assists traders in evaluating momentum and potential reversal points within the market.

Overbought and oversold signals (levels at 80 and 20)

The stochastic oscillator has a value between 0 and 100. Values greater than 80 usually represent overbought levels, meaning the asset is likely overvalued and due for a corrective decline. In contrast, values lower than 20 represent oversold levels, which suggests that the asset is likely undervalued and could increase.​

Applying the Stochastic Oscillator to swing trading

Spotting potential reversals with line crossovers

In swing trading, traders look for crossovers between the %K and %D lines to identify potential entry and exit points:​  

• Bullish signal: Occurs when the %K line crosses above the %D line, especially when both are in the oversold region (below 20).​
• Bearish signal: Occurs when the %K line crosses below the %D line, particularly when both are in the overbought region (above 80).​

These crossovers can signal potential reversals in price trends.  

Pairing with other indicators to confirm market signals

To enhance the reliability of signals, many swing traders often combine the stochastic oscillator with other technical indicators:​

• MA: Aligning stochastic signals with moving average trends can provide additional confirmation.​
• RSI: Using the RSI alongside the stochastic oscillator can validate overbought or oversold conditions.​

By using more than one indicator, traders can minimize the chance of false signals and improve the accuracy of their trading decisions.

Combining swing trading indicators for better results

The benefits of using multiple indicators

Integrating multiple technical indicators in swing trading can enhance decision-making by providing a more comprehensive market analysis. Each swing trading indicator offers unique insights:​

• Trend indicators: Tools like MA help identify the overall market direction, assisting traders in aligning their positions with prevailing market trends.​
• Momentum indicators: Indicators like the RSI help to measure price fluctuations and ascertain overbought or oversold conditions by assessing the speed and rate of change of price movements.
• Volume indicators: Metrics like on-balance volume (OBV) analyze trading volume to confirm price trends and the strength behind price movements.​

By combining these indicators, traders can cross-verify signals, reducing the likelihood of false entries and exits. For instance:​

• MA and RSI combination: Utilizing moving averages to identify trend direction and RSI for reversal confirmations can greatly improve entry and exit strategies.
• MACD and Bollinger Bands: The moving average convergence divergence indicator signals momentum changes, while Bollinger Bands indicate volatility and breakout points. In combination, they provide a more accurate assessment of market conditions.

Avoiding overcomplication in analysis

While it can be beneficial to combine different indicators, adding too many tools to an already congested chart will result in analysis paralysis. For ease of interpretation:

• Use 2-3 complementary indicators: Use indicators that perform different but complementary analytical functions. For instance, combining a trend and a momentum indicator will provide a balanced view of the market.
• Tailor indicator settings to match trading style: Adjust technical indicator parameters to align with your specific trading timeframe and objectives. Customizing settings ensures signals are relevant to your trading strategy and market conditions.​

By thoughtfully combining a few well-chosen indicators and customizing their settings, swing traders can enhance the accuracy of their analyses without overwhelming themselves, leading to more informed and effective trading decisions.​

Mastering swing trading with key indicators

Discipline and consistency promote swing trading success. Additionally, having a confident understanding of the market is just as important. Throughout this guide, we’ve revealed the best indicators for swing trading, each playing a unique role in helping traders precisely identify potential entries and exits.

These are the top five swing trading indicators:

1. Moving averages: Helps to smooth out price data to reveal the direction of the trend while also revealing support and resistance zones.
2. MACD: Highlights trend momentum and potential reversals with crossovers and divergences.
3. RSI: Measures momentum to spot overbought and oversold conditions.
4. Bollinger Bands: Follows the volatility and potential breakouts using channels created from standard deviation. 
5. Stochastic oscillator: Compares recent closing prices to historical ranges to detect momentum shifts.

Final thoughts

Tools are powerful in swing trading, but one thing is evident—no tool guarantees results. All tools need to be backed by constant testing and adjustments. Feel free to set various goals and analyze how they perform in different market conditions with the help of a demo account. It’s the best way to fine-tune your trading strategies and swing trading indicator settings.

To swing trade successfully, traders need experience, not shortcuts. By mastering these different swing trading indicators and continuously taking the time to learn, traders can create reliable strategies that work towards achieving their trading goals.