Swing trading is a fast-paced trading method that is accessible to everyone, even those first starting into the world of trading. The pace is slower than day trading, and provides you with enough time to formulate a process and perform a little research before making decisions on your trade. Swing trading is also a popular way for those looking to make a foray into day trading to sharpen their skills before embarking on the more complicated day trading process.

How Does Swing Trading Work?

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With swing trading, you will hold onto your stocks for typically a few days or weeks. This can open you up to the possibility of larger profits that can be acquired from holding on to the trade for a little longer. Since swing trading involves a shorter time frame than long-term investments, you will be able to properly focus on the entry and exit of that trade through the process. Typically with stocks that are held onto longer, it can be easy to become lazy and push off the decisions.

There are two swings to look for as a trader:

  • Swing lows: This occurs when a market bounces after hitting a low, giving traders an opportunity for a long trade. If you open a long trade at a low, you want to close it during a high.
  • Swing highs: You can take advantage of a short trade when the market hits a peak. When you open a short trade during a high, you want to close it at a low to maximize your profits.

Swing Trading Indicators

Swing trade indicators are crucial to focus on when choosing when to buy, what to buy, and when to sell. Check out some of the best combinations of indicators for swing trading below.

1. Moving Averages

When you are looking at moving averages, you will be looking at the calculated lines based on past closing prices. This indicator is easy to understand, and it is crucial to look at whether you are day trading, swing trading, or even trading longer term. They are used to either confirm a trend or identify a trend.

There are two main types of moving averages: simple moving averages and exponential moving averages.

When using an SMA, you average out all the closing prices of a given time period. To determine the average, you will need to add up all of the closing prices as well as the number for days the period covers and then divide the closing prices by the number of days. This process gives all of the calculation’s values equal weight.

To effectively use simple moving averages, you will need to calculate different time periods and compare them on a chart. This will give you a broader viewpoint of the market as well as their average changes over time. Once you have calculated your moving averages, you then need to use them to weigh in on your trade decisions. You can use them to:

  • Identify the Strength of a Trend: If the current price of the stock and trend are farther away from its moving average, then it is considered to be a weaker trend. Trend strength, combined with an indicator like volume, can help you make better decisions on your trades.
  • Determining Trend Reversals: You can use moving averages to help identify trend reversals with crossovers. You need to watch for instances where the recent moving averages cross the longer moving averages after an uptrend. Be advised, though, that this is not the only tool you should use to determine reversal, but it can help you determine whether you should investigate it further.

Unlike SMAs, EMAs weigh the most recent data more heavily, allowing the exponential moving average to quickly adapt to any changes in price. Both of these moving averages have their own advantages. Which you choose is really dependent on the market and strategy you’re using.

2. Relative Strength Index

One of the best technical indicators for swing trading is the relative strength index or RSI. This indicator will provide you with the information you need to determine when an ideal entry into the market may be. It allows you to investigate short signals better. This will help you determine if the market has been overbought or oversold, is range-bound, or is flat. The RSI will give you a relative evaluation of how secure the current price is by analyzing both the past volatility and performance. This indicator will be identified using a range of 1-100. The RSI indicator is most useful for:

  • Determining When a Security Is Overbought or Oversold. You will need to be able to identify these conditions so that you can find both trend corrections and reversal. Overbuying can signal a bearish trend while overselling can be seen as more bullish. Indicators around 70 may mean that the security was overvalued or overbought. If the indicator is around 30, it could indicate an undervalue or oversold.
  • Identifying Divergences. Divergences are used to identify reversals in trends. When the price hits a new low but the RSI does not, it would be considered a bullish divergent signal. If the price hits a new high and the RSI doesn’t, that would be termed a bearish signal.

3. Volume

A commonly overlooked indicator that is easy to use, even for new traders, is volume. Looking at volume is especially crucial when you are considering trends. Trends need to be supported by volume. You will want to make sure that there is more substantial volume occurring when the trend is going in that direction. Rising volume means money supporting the security, and if you do not see the volume, it could be an indication that there are oversold or undersold conditions at play.

4. Visual Analysis Indicator

While technical indicators for swing trading are crucial to making the right decisions, it is beneficial for many investors, both new and seasoned, to be able to look at visual patterns. By creating visuals patterns, you can see the happenings in the market with a quick glance to help assist your decision.

Tips for Improving Your Success at Swing Trading

Once you know the importance of the above swing trade indicators, there are a few other tips you should follow to allow you to be more successful at swing trading.

1. Always Limit Your Losses

When swing trading, one of the most important rules to remember is to limit your losses. That means you need to act fast and cut your losses quickly. Don’t hold out in the hopes of salvaging your trade; if you have determined that a trade clearly is not working, it is better to dump it even if you lose, rather than risk losing more.

2. Keep Your Risk to 1% or Less Per Trade

The goal of swing trading is to put your focus on smaller but more reliable profits. This way, you are more likely to come out ahead than behind. Don’t constantly look for the home run; instead, consider small moves that may amount to more than one lucky hit.

Some traders limit their risk to 1% of their total account, but this can often be too restrictive and limit your gains. By keeping it to 1% per trade, you will limit your losses while keeping yourself open to better gains.

3. Determine Your Mental Stops

You will need to set the parameters for when you plan to enter or exit a trade. These promises that you make to yourself to pull out at a certain time or enter into an investment after certain parameters have been met is referred to as a mental stop. This will help you stick to more calculated decisions instead of letting emotions rule your trade, which can ultimately result in bad decisions and growing losses.

4. Look at the Stock’s History of Volatility

As the old saying goes, history often repeats itself. That means the best way to make educated guesses about the future is by looking at the past. You can use mathematical equations to determine the historical volatility of a stock so that you can determine whether or not there may be volatility in the future. To determine volatility, you will need to:

  1. Gather information on the stock’s past performance into a spreadsheet.
  2. Calculate logarithmic returns by creating a ratio between the closing price and the closing price of the previous day.
  3. Determine the standard deviation.
  4. Calculate the annual volatility by multiplying the daily volatility by the square root of the number of days in the trading year.

5. Always Stick to Your Plan

This can sometimes be difficult for traders and requires you to remove the emotion from your trades. Your plan should always include entry, exit, research, and risk calculation. Once you have set your guideline for when you plan to exit and enter a trade, make sure you stick to that plan and don’t let the heat of the moment allow you to make rash decisions that can result in heavier losses than you anticipated.

Swing Trade Strategies

Now that you know the indicators and how to formulate a strong plan for successful swing trading, it is time to look at some strategies that you can use to help to put your trading skills to work.

  • Breakouts: One swing trading strategy is to get your position at the beginning of the uptrend. While monitoring a stock, you will set the desired level of volatility and movement, and when it is reached, you will enter the trade.
  • Breakdowns: The opposite of a breakout is a breakdown. This occurs when the stock is below the support level.
  • Options: Options are another swing trade strategy ideal for those who are looking for leverage on an investment. With these, you get the option to buy or sell later, if certain criteria have been met.

Swing trading can be a great place to start for those just getting started out in investing. It can also be an excellent option for those looking for more active trading at a slightly slower pace than day trading. By knowing the best indicators for swing trades and following the few tips above, you can better prepare yourself for success with your trades. Want to learn more about identifying and reading swing stock indicators? Sign up for our webinar or download our free e-book on investing

Jeff Williams

Jeff Williams is a full-time day trader with over 15 years experience. Thousands of entry-level and experienced traders alike – day-traders and swing-trade small cap stock traders – credit Jeff with guiding them to turning small accounts into big accounts.

Jeff’s "Small Account Challenge" shows people how to transform accounts from a few thousand dollars into $25k, $50k or even $100k.

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