If you hold your trades open for a few days or weeks and look to trade strong impulsive or corrective moves in the market, you can call yourself a swing trader.
Swing trading is a slow-paced trading style that can be very rewarding for patient and disciplined traders. It also comes with relatively lower trading costs compared to scalping and day trading, and the average winners are usually much higher due to the long holding periods of swing trades.
Here, we’ll take a closer look at the best indicators to use for swing trading.
One of the best indicators by far that swing traders can use is moving averages. As their name suggests, moving averages calculate the average price for a pre-specified number of previous closing prices and plot that price as a line on the chart.
Swing traders can take advantage of moving averages in a number of ways. First, the slope of a moving average provides important insights into the strength of the current trend. An upward sloping moving average signals an uptrend, and a downward sloping moving average a downtrend.
The angle of the slope is also important, with the best trends usually forming at a 45-degree angle. If the trend is too steep, you run the risk of a pre-mature trend correction, and if the trend is too gentle, it may not provide enough profit opportunities.
Another way to use moving averages in swing trading is to look for dynamic support and resistance levels. The price tends to respect the 50-day, 100-day, and especially 200-day moving averages once it reaches close to those lines. This can also offer attractive trading opportunities in the direction of the overall trend.
Oscillators are technical indicators that oscillate between an upper and lower range, usually between 0 and 100. Examples of oscillating indicators are Stochastic and the Relative Strength Index, for example.
If you already have any trading experience, chances are that you already know what these indicators measure. In essence, oscillators measure the strength of price movements within a specific period of time. For example, if the price rises sharply in the morning session, the RSI will quickly become overbought, and if the price falls sharply in a short period of time, the RSI will quickly become oversold.
For the RSI, overbought conditions occur when the indicator’s value crosses above 70, while oversold conditions occur when the value crosses below 30. Overbought conditions offer a selling opportunity, while oversold conditions offer a buying opportunity.
The important thing to understand here is that, as a swing trader, you’re interested in trading in the direction of the underlying trend. This is exactly where oscillators come into play: If the market is in a strong uptrend (moving average sloping upwards with an angle of 45 degrees), you should look for pullbacks that push the RSI below the 30 mark to initiate a buying position.
The opposite is true for selling positions (MA sloping downwards at 45 degrees and RSI reaching 70.) Try to incorporate these rules in your trading plan, and you should soon see an improvement in your trading performance.
The Put/Call Ratio
Here comes a hidden gem for all swing traders, whether you’re trading Forex, stocks, or commodities. The put/call ratio is a potent indicator that can be used to anticipate future price changes in the market. The put/call ratio is based on the options market, and any asset class that has a liquid options market can be used in combination with the indicator. This means currencies, stocks, commodities, metals, energy, or any other asset class that comes with options.
The put/call ratio is simply the ratio between the price of the underlying put options and the price of the underlying call options. Put options give the owner the right, but not the obligation to sell the underlying instrument at a pre-specified strike price, while call options give the owner the right, but the obligation to buy the underlying instrument at the strike price.
This is important to understand because rising demand for call options increases their price and signals that investors are betting that the underlying market may rise in value. Similarly, rising demand for put options increases their price and signals that the underlying market may fall in value.
A put/call ratio of one or higher signals therefore a selling opportunity, as put options are relatively more in demand than call options. The opposite is true when the put/call ratio falls below 1.
However, bear in mind that some traders use the put/call ratio as a contrarian indicator, which means they buy when the ratio rises above 1 and sell when the ratio falls below 1. You need to perform backtesting first to determine whether this works for your trading strategy.
Bonus: The ATR Indicator
Last but not least, swing traders can take advantage of the ATR indicator. While the indicator isn’t used to determine future price changes, it can be used to measure the volatility of the underlying market and to adjust position sizes and trading risks accordingly.
The ATR (Average True Range) indicator measures the volatility of the market by taking into account the average ranges of the last trading periods. A higher ATR value signals a more volatile market, so traders need to adjust their trades by either reducing their position sizes or by widening their stop-loss levels. The opposite is true when the ATR value is relatively low: This signals lower volatility and offers the opportunity to put on tighter stop-losses and higher position sizes.
Swing trading is can be a very rewarding trading style if you know how to properly analyze the market for trading opportunities. In this article, we have covered the best indicators to use for swing trading, including moving averages, oscillators, the put/call ratio, and the ATR indicator.
However, if you decide to apply any of these indicators to your trading strategy, make sure to perform rigid backtesting first to check whether the results reflect your risk tolerance.