Swing trading provides a lot of opportunity in the market for larger moves and larger profits, whether it’s swing trading options or stock- to help traders take advantage of those moves traders should really understand what indicators they are using and which hold the most value. Here is an introduction to the top indicators used for swing trading which include the volume profile, moving averages, market breadth, and the RSI (relative strength index).
What Is Swing Trading?
Swing trading is a market strategy that encompasses days, weeks, or even months of holding onto a position that takes advantage of market moves within the larger market trend. The easiest way to define swing trading is the middle step between day trading and investing.
Swing traders usually hold positions for at least over a day to under a year and anything in-between. The typical swing trade that we’re going to be talking about throughout this article is going to be a few days to a few weeks.
Swing traders aim to take advantage of momentum in the market or key points of inflection and just like day traders, swing traders aim to take advantage of upward and downward movements in the market.
What Is a Swing Trading Indicator?
Indicators are a part of technical analysis that are generally used to identify changes or continuations in market momentum which can allow traders to see market opportunities. Momentum is a key driver in swing trading as you need multiple days of continuous momentum to have a profitable trade.
Generally, swing trades can be divided into either momentum trades that continue in the current trend or large points of inflection that turn the momentum around for a reversal trade.
Momentum trades can be pullbacks or breakouts. Both momentum trades and reversal trades can be identified through indicators.
Top 5 Swing Trading Indicators
We’ve talked about the volume profile a countless number of times throughout our other posts, and we won’t do it justice in a short excerpt like this. You can find a lot of information in the following post, all about volume profiles. The ultimate volume profile guide for futures trading & how to read volume on TradingView.
The Volume Profile allows traders to see the volume displayed vertically on a chart so that we can see how thick or thin the volume was traded at a certain stock price level.
There are several components to the volume profile:
- Value area: 70% of the volume is traded within this region
- Value area high/low: The two levels at the ends of the value area that sandwich the value area within.
- Point of control: The singular level on the volume profile where we have the most traded volume in that specified time period.
- High/Low volume nodes: high volume nodes are volume profile areas where there is extended volume traded at a price causing the volume profile to stick out longer. Low-volume nodes are volume profile areas where there is little to virtually no volume.
- Distribution blocks: Thick areas on the volume profile that resemble bellies where multiple high-volume nodes are stacked together.
- Ledges: areas where high-volume nodes drop off to low-volume nodes.
When using a volume profile to swing trade, there is a fairly simple way to identify the lower-risk opportunity. There are two different ways to look at the profile and how to use it. Either for momentum continuation moves or for reversals and massive points of inflection.
We are going to focus on the distribution blocks and the volume profile ledges in this regard.
First, distribution blocks, they can be found where multiple high-volume nodes come together, price treats these areas as balance because volume attracts price. Meaning that price would move from area to area in terms of distribution blocks.
Take a look at TSLA here below, we’ve identified 3 different distribution blocks in orange based on the volume profile.
When price escapes a distribution block, we tend to move into the next area of high volume as seen above. When price enters a new distribution block, we will target the other end of the distribution block.
This presents swing trading opportunities because:
- You can target one end of the distribution block to the other which can be a multi-dollar move in a stock and last several days. In TSLA case we have a 30-dollar move from the top to the bottom of the distribution block.
- When you escape a balance area, or a distribution block, you will target the next large area of volume or distribution that’s presented on the chart in the direction of the break, In this case, TSLA, we break under 283 and target the distribution that starts at 253, another 30 dollar move away.
With distributions come ledges, ledges are what sandwich distributions because this is where volume drops off from high volume (the distribution) to low volume. Creating what looks like a shelf or ledge on the profile forms a visual perspective.
These shelves or ledges are very useful for finding large market reversals against the trend and points of inflection.
These become low-risk areas where the price is expected to bounce off and continue in the opposite direction.
Take a look at this image of TSLA below, we have a very defined distribution mapped out, the more obvious the ledge the better it is. Try to avoid any ledge and focus on those that are very noticeable.
The top of the ledge around 313 on TSLA you can open a low risk short position in the anticipation that this stock turns to the downside. With that, you can wait for confirmation such as large bearish candlesticks and volume.
The combination of distribution blocks and ledges builds a solid foundation for finding areas to swing trade on a chart. The volume profile will held you build out levels where you can expect price to turn and reverse and even understand the directionality of a stock.
Volume, similar to the volume profile but not to be confused with the volume profile is a great tool for all traders around. Volume shows traders the strength of the current trend, a trend with higher volume trader is expected to continue and show strength. A trend with weaker volume overall isn’t expected to last too long.
Volume shouldn’t be confused with “buying” or “selling” volume, rather larger volume days mean there are more shares being traded. You have to have as many buyers as you have sellers to transact market orders.
Take a look at the following example of AMD.
When we see large jump in volume in a trend just as we have here on the bullish side, swing traders can expect to take advantage of the move higher for a multiple-day period, multiple week or month.
There is a large ledge on the volume profile and multiple top resistance that breaks out around 97.30 where price breaks and runs to 123 before running all the way to 156 on AMD and there are several areas of increasing volume that can help swing traders sustain the upside momentum in their trade and gain confidence in the trend.
Moving averages allow traders to identify trends in the market and the continuation of those trends as long as the price holds the moving averages.
Moving averages calculate the mean of a market’s price movement over a certain period of time. There are multiple types of moving averages such as simple moving averages and exponential moving averages.
A simple moving average calculates the mean of the price that gives each day an equal weight. While exponential moving averages give more weight to the most recent price making the average a little smoother than a simple moving average.
The moving average indicator usually acts as a lagging indicator because the data taken is from the past days to calculate the average.
Traders can categorize moving averages into short, medium or long-term, depending on the periods looked at. Short-term are around 5 to 50-day period moving averages, 50 to 100-day periods are medium-term moving averages, and 100 to 200-day periods are long-term moving averages.
Swing traders usually use moving averages on a medium to long-term basis, the classic strategy is a moving average cross over. When the shorter-term moving average crosses above the longer-term moving average we can expect a bullish moving. When the shorter-term average crosses below the longer-term average we can expect a bearish move.
Moving averages are also used as support and resistance levels on pullbacks in the market.
Below is a chat of GOOGL with three moving averages, the blue: 20-day, the orange: 50-day, the green: 100-day averages.
There are three orange circles that indicate when and where the shorter-term averages crossed below the longer-term averages to continue the downside trend move where swing traders can take advantage of the downside trend.
There are instances where the prices comes into the moving averages as resistance.
Market breadth is a reading of how many stocks in an index or exchange are doing well or doing poorly, rising or falling, above a certain moving average or below.
It tells us how strong the index is based on the stocks that make up the index. This is important because an index is made up of multiple stocks, hundreds usually and if the index is rising without breadth really rising it could be a false rally.
One of the best ways to use market breadth is in an overbought or oversold oscillator indicator.
There is one available (breadth.app) on TradingView. Take a look at the chart below on SPY, traders should use breadth along with an ETF on index like SPY.
Reading the market breadth, traders can look at it as overbought or oversold. Above 80 we are oversold and under 20 we are overbought. However, a classic caveat is that we can stay overbought or oversold for extended periods of time.
That is why there are other criteria added. When the price moves from oversold sub 20 then back above 20, traders can infer that the market is starting to move higher and we can get a shorter bullish move.
Relative Strength (RSI)
The relative strength indicator or RSI is a momentum oscillator indicator that moves within larger trends and has value for swing traders. The momentum indicator works in a similar way as the breadth indicator above, moving from overbought to oversold.
The indicator has a range from 0 to 100 and denotes a measurement of the number and size of the market, or stocks positive and negative closes throughout a period (usually 14).
Below you can see an example of the RSI on AMZN. There are two examples of where the price is overbought or oversold.
The RSI is typically considered oversold under 30 and overbought above 70.
The first is oversold as the RSI dropped below 30 into nearly 20 staying there for a while, as price caught a support and started to rally. The second example of arrows shows traders the overbought portion where the RSI rallied above 70 towards 75, peaking its head only before the selling began.
This is really advantageous to swing traders as they can see where the extreme overbought and oversold areas are on a chart, and even though it will not give a trader an exact top or bottom, traders can use volume profile and other areas to find support resistances to play with this momentum indicator.
A main aspect to keep in mind is that RSI can stay overbought or oversold for a while before the price actually turns.
Swing trading encompasses a lot of tools and a longer period of time in trades, which means that there are multiple different ways to go about swing trading.
The indicators mentioned throughout this article are a great foundation and here are a few other things that swing traders might consider adding to their arsenal.
- A good understanding of support and resistance.
- Understanding of trends, breaks, and continuations.
- Market technical patterns can lead to price continuations or reversals.
All of the indicators mentioned throughout this article can be found in TradingView and most likely any platform you decide to use.
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The information contained in this post is solely for educational purposes and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable for your own financial situation. TRADEPRO AcademyTM is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.