A TradeSanta’s Quick Guide to Best Swing Trading Indicators

Featured Photo by Adam Nowakowski on Unsplash

This short overview was motivated by the recent TradeSanta’s insights into Top 6 Indicators For Swing Trading.

  • Put Swing Trading (ST) somewhere in between day trading and buy-and-hold investment type.
  • STers tend to make a lot of small wins, and in the long run, these gains might even exceed the gains of a trader who waits for months to win big.
  • The ST goal is to catch the trend and close as many deals as possible.
  • A challenge for all ST strategies is identifying when to enter and exit a trade. 
  • To start returning small consistent earnings, you need to follow strict money management rules that are often based on technical analysis.
  • An optimal solution is to use automated ST software.

Consider the following benefits of automated trading as compared to manual trading:

  • Completely removes emotion from trading decisions.
  • Traders can build a portfolio of different systems to cover different market conditions allowing for a level of diversification in their approach.
  • Traders can quickly identify whether a system has worked historically and gain useful statistics to understand when it will stop working in the future (such as exceeding historical consecutive losses, etc).

Let’s have a quick look at the top 6 ST indicators.

RSI

  • Traditionally, while using RSI, traders set up the values of 30 and 70 to spot oversold or overbought signals.
  • If the asset is oversold (RSI<30), it means that it has traded lower in price and has the potential for a price bounce. The situation represents BUY for long-term investors betting against the bearish trend.
  • And vice versa, the asset is considered overbought, when its RSI>70. 

STOCH

  • The Stochastic Oscillator (STOCH) is a range bound momentum oscillator. The Stochastic indicator is designed to display the location of the close compared to the high/low range over a user defined number of periods. As with RSI, the Stochastic Oscillator is used for identifying overbought and oversold levels.
  • The values of the Stochastic Oscillator are normally plotted in a range between 0 and 100, and very often traders set them up in the way that below 20 means an oversold signal and above 80 means an overbought signal. 
  • While RSI measures the velocity of price movements, Stochastic shows the market’s sentiment at the end of the day. It is based on the idea that only the closing price defines the trend.

EOM

  • The Ease of Movement indicator (EOM) is a volume based oscillator. It is designed to measure the relationship between price and volume and display that relationship as an oscillator that fluctuates between positive and negative values. The EOM fluctuates above and below a Zero Line. This is done in order to quantify the “ease” of price movements. A basic understanding is that when the EOM is in positive territory, prices are advancing with relative ease. When the EOM is negative, prices are declining with relative ease.
  • The formula to calculate the ease of movement looks like this. Subtract yesterday’s average price from today’s average price and divide the difference by the change in volume over the period of today and yesterday.
  • The longer the oscillator line below or above zero, the easier the movement up or down. And the more probable is the trend.

MACD

  • MACD (Moving Average Convergence/Divergence) is an extremely popular indicator used in technical analysis. MACD can be used to identify aspects of a security’s overall trend. Most notably these aspects are momentum, as well as trend direction and duration. 
  • There are two MACD modifications: a linear MACD and a MACD histogram.
  • A linear MACD consists of two lines: a MACD line and a MACD signal line. 
  • The signal for trend changing and thus a potential good time to buy or sell takes place when those two lines cross.
  • A potential good time to buy is when the MACD line crosses the MACD signal line from below.
  • It gives you a sell signal when the MACD line crosses the signal line from above.
  • If the MACD is above the signal line, the histogram will be above the MACD’s baseline, or zero line. 
  •  If the MACD is below its signal line, the histogram will be below the MACD’s baseline. 
  • When the histogram is growing, it might be a start of the accelerating bullish trend.
  • And vice versa, once the histogram is shrinking, it might be a start of a bearish trend.

BB

  • Bollinger Bands (BB) consist of a band of three lines which are plotted in relation to security prices. The line in the middle is usually a Simple Moving Average (SMA) set to a period of 20 days. The SMA then serves as a base for the Upper and Lower Bands which are used as a way to measure volatility by observing the relationship between the Bands and price. 
  • When the price of the asset breaks below the lower band of the BB, prices have perhaps fallen too much and are due to bounce. Time to buy! 
  • And vice versa, once the price breaks above the upper band, the market is perhaps overbought and due for a pullback. Time to sell! 

VO

  • The Volume Oscillator (VO) is an indicator made up of two Moving Averages (MA) surrounding volume, one being fast and the other slow. The slow volume MA value is then subtracted from the value of the fastlow Moving Average. 
  • The VO can indicate the lack of enthusiasm or, quite the contrary, a lot of enthusiasm on the market.
  • If the VO>0, the sentiment is positive, and the trading volume is high.
  • If VO<0, the market is in decline (the trading volume is low).

Key Takeaways

  • RSI/STOCH – early spot an opportunity
  • EOM – predicts a current trend with confidence
  • MACD – generate robust BUY/SELL signal alerts
  • BB – double check MACD trading signals/alerts
  • VO – simple market sentiment check
  • Use automated trading software (e.g. bots)

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