What are the best indicators for swing trading?
Indicators are renowned for their ability to sniff scalping opportunities. Forex mentors have developed loads of indicator-based scalping strategies.
Nonetheless, there are quite a few reliable indicators for swing trading.
What Is Swing Trading?
The forex market can be traded in a number of ways. Some traders prefer intraday trading; orders are placed/ closed in a single trading day.
Intraday traders are orders opened and closed within the same trading. Each day, the forex market opens from 5 p.m. EST until 4 p.m. EST. Any trade within this time frame is called intraday trades.
When it goes beyond a single trading day or more, it is a swing trade.
Swing trading is a much more laid-back approach, it involves market analysis of macro-trends. From a swing trader’s standpoint, daily changes in price are labelled as noise, and market structure on the 4hr time frame to the weekly is prioritized.
Although after a higher time frame analysis has been completed, swing traders then look to look for an entry on lower time frames.
Make no mistake, regardless of the larger time frames the market is not traded differently. Price action and market behaviours remain the same in every time frame.
There isn’t a lot of attraction to swinging as scalping since trades can be held for days and go up to weeks/ months. Nevertheless, this tradeoff is worth it as the risk-to-reward ratio increases significantly and it is not time-consuming.
Indicators for Swing Trading
To demonstrate how to use this indicator for swing trading, each of them will be used on the daily chart of GBP/USD.
All the examples below are sell setups peculiar to each indicator. The arrows represent the possible entries on each chart.
#1. The Ichimoku Cloud
The Ichimoku indicator is one of the few leading indicators out there. It is an “all in one” system so no other indicator is needed alongside it.
Hence, it qualifies as a very good indicator for beginners. It instils discipline and trend trading. Some money management practices are built into this indicator too.
However, it is quite complicated to use at first glance because it comprises different components so charts tend to look messy.
The Ichimoku contains two major components and they are; Senkou Span, Tenkan-sen/ Kijun-sen, and the Chikou Span.
The Senkou span is cloud-like and they indicate the market’s overall trend. Its major function is to filter out high probable trades while abiding by the current market trend.
When the market is in an uptrend it trades above the cloud. It is down-trending when it is below and consolidating when the price is in the cloud.
Tenkan-sen/ Kijun-sen is very similar to moving averages, they provide entry into this trading system. Tenkan reacts fast to price fluctuations while the latter responds slowly.
When the tenkan crosses the kijun upwards, it is a buy signal. On the contrary, the tenkan crossing the kijun downwards indicates a signal for a short.
As seen in the chart above, the price was below the cloud; a downtrend. The tenkan and kijun crossed presenting an entry to the downside.
#2. Moving Averages
Moving averages are undoubtedly one of the most used forex indicators. It calculates the mean of a given number of previous closing prices of a currency pair. This period can be days, weeks, months, etc.
The forex market moves in a wave-like/ zig-zag pattern form so the overall market trend can be difficult to determine. A moving average indicator “smoothens” price and “predicts” the market’s direction.
MAs are lagging indicators as it only displays past data, hence, it is prone to fake signals.
Moving averages are one the most used forex indicators. It takes the mean of previous closing prices of a currency pair for a specified period. This period can be days, weeks, months, etc.
The forex market moves in a wave-like/ zig-zag pattern form so the overall market trend can be difficult to determine.
A moving average indicator “smoothens” price and “predicts” the market’s direction so it is a perfect tool for new traders.
Moving averages’ periods can be tweaked to various values depending on the need. For swing trading, moving averages of large periods should be used.
As everyone knows, when the moving average crosses price upwards it is a bull signal. A bearish signal is indicated when a downward cross occurs.
Here, the moving average is below the moving average meaning it is a downtrend. Points, where the price rejects the moving average, are perfect entries.
RSI stands for; Relative Strength Index. It is a momentum oscillator that measures the speed and change of price movements. It was developed by J. Welles Wilder.
The magnitude of recent closing prices is measured and used to predict reversals; changes in trends.
The RSI indicator predicts these reversals by plotting readings in overbought and oversold regions which are within a range of 1-100.
Oscillators are easy to use and this trend continues for the RSI indicator as well.
As mentioned above, when the RSI plots a value above 70, the commodity is overbought. Most likely bullish pressure cannot be maintained anymore and this is a sell signal.
RSI readings below 30 signify the currency pair has been oversold. In most cases, a bullish reversal occurs.
In the image above, the RSI is in the overbought region indicating a sell opportunity.
Do Swing Traders Use Indicators?
Whether you swing trade, trade intraday, or scalp, all forms of market analysis can be used. This includes fundamental analysis, technical analysis- price action and indicator trading.
As proposed by the Elliott wave theory, the market consists of a series of re-occurring patterns. The theory state that these patterns/ structures merge to make larger versions of themselves.
For this reason, it can be concluded that every time frame has the same behavioural characteristics. Hence, the same trading principles can be applied.
Yes, it is less popular for indicators to be used for swing trading, but it is possible. A personal favourite of mine is the Ichimoku cloud. Although it is quite difficult to grasp initially it is a profitable indicator.
Similarly, the moving average convergence divergence (MACD) can be used to swing trade as well.
Is MACD a good indicator for swing trading?
The MACD is definitely suitable for swing trading. Although the parameters might have to be changed.
This indicator has a histogram that measures the bullish/ bearish momentum. Alongside this, there are two lines namely; the signal line and the MACD line.
Whenever these lines cross, it signals either a buy or sell signal. Learn more about this indicator here.
Additionally, there are times when the MACD and the price do not correlate which means there’s a divergence. An action of this nature means a trend change is imminent.
The relative strength index was created by a man named J. Wilder for swing trading stocks. Over the years, forex trading came by and forex traders have adopted this indicator as well.
Period 14 is the default setting of the RSI indicator and it is suitable for swing trading without any adjustments. With the help of this tool, overbought and oversold regions can be determined. At these levels, trend reversal tends to occur.
Summary: Three Best Indicators For Swing Trading
Most indicators need to be partnered with one another to develop a solid strategy for trading. So, rigorous backtesting to find the right balance for YOU is required.
The Ichimoku cloud is an exception to this, it’s difficult to use but it provides traders with a complete package.
Keep in mind that the key to swing trading is to ignore short-term sentiment. Instead, only the structure on higher time frames should be considered important.
An important virtue for swing traders is patience. It takes days for the price to get to potential buying and selling zones or take profits.