Technical Analysis
Swing traders do not blind trade. This is because failure to conduct upfront research on financial markets can lead to significant losses. As a result, they use swing trading technical analysis strategies to spot trading opportunities and inform their trading decisions. Technical analysts focus on examining previous trading activities and price action to discover trading patterns and predict an asset’s future price movements.
Regardless of which trading instrument you’re investing in, technical analysis plays an integral role. This is because it studies the instrument’s previous volume and price history. That said, you can determine the assets that are worth your investment, depending on their previous trading volume, volatility, and price.
This comprehensive guide will help you learn critical concepts surrounding technical analysis, including the best strategies and indicators for swing trading.
What is Technical Analysis?
People often wonder what technical analysis is and how it relates to swing trading. Well, technical analysis is a discipline designed to scrutinize investment options and help traders spot trading opportunities. It involves analyzing statistical patterns collected from markets’ trading activities like volume and price action.
Technical analysts, including swing traders, study volume and price trends to discover potential trading opportunities. They use various tools to evaluate ways in which a security’s demand and supply will influence changes in implied volatility, price, and volume.
What are the Benefits of Technical Analysis?
Swing trading with technical analysis is useful in that it helps generate short and long-term trading signals using charting tools. Charting tools give you a visual representation of how an asset’s market is based on real-time data.
Also, using technical analysis for swing trading improves your ability to assess a security’s weaknesses and strengths compared to the broader market. Therefore, it increases accuracy in overall valuation estimates.
Which Securities Can We Apply Swing Trading Technical Analysis to?
There is no limitation which securities you can apply technical analysis on. As long as the asset has historical trading data, you can apply technical analysis and indicators. Therefore, it doesn’t matter whether you’re swing trading cryptocurrencies, ETFs, stocks, forex, or any other security. In all cases, technical analysis is applicable.
Understanding Technical Analysis
Technical analysis tries to predict the price action of virtually any instrument that is tradable. This asset must be subject to supply and demand forces for it to qualify. In fact, some traders perceive technical analysis as the study of supply and demand forces as mirrored in the asset’s market.
While most analysts apply swing trading analysis to price changes, others monitor multiple numbers, including open interest figures or trading volume. Across the entire industry, there exist numerous signals and patterns developed by various researchers. All these signals support technical analysis.
There is a continuous development of swing trading systems to help traders predict and trade based on price actions. As a result, more technical analysis tools for swing trading are being developed. Some tools and indicators focus on identifying current market trends, such as resistances and support levels.
On the other hand, other indicators concentrate on determining the trend strength and the possibility of continuation. Regardless of which area technical indicators focus on, they provide critical insight into how a trader should go about the next trade.
What are Swing Trading Indicators?
Swing trading indicators are technical tools used to help traders spot new trading opportunities. A swing trader’s target is to generate profit from mini trends that appear between lows and highs and vice versa. Therefore, they must find new momentum as quickly as possible to benefit from such opportunities. They use swing trading indicators to spot breakout and trend opportunities.
What are the Best Technical Indicators for Swing Trading
Technical indicators typically involve some arithmetic or statistical transformation of volume and/or price data. These transformations provide computational descriptions of down/up movements, momentum, support and resistance levels, and trends, just to mention a few.
There are numerous technical indicators available for use by swing traders. Those indicators fall into multiple categories, including volume-based, price-based, non-chart-based, overlays and breadth. Here are some best technical indicators worth giving a try, along with their corresponding categories.
Volume-Based Indicators
The on-balance volume (OBV). This indicator uses volume to forecast subsequent price changes. Joseph Granville invented OBV because he believed that volume is a fundamental force that drives markets. The indicator’s proponents place credence on the ideology that if an asset’s volume changes to weak, there’s a potentially upcoming price movement. This movement can either be upward or downward.
Money flow index (MFI). It measures the cash flow into and out of the market over a given period. MFI uses volume and price data to spot oversold and overbought signals in a financial instrument. Also, swing traders use it to identify divergencies that warn of potential trend changes.
Williams distribution/accumulation. This indicator searches for divergencies between an index’s or security’s volume and price flow. It is designed to help traders determine when to buy or sell. For instance, if an asset’s price hits a new low and the volume fails to make a new swing low, it is often taken as a buying indicator. You can calculate William’s Accumulation/Distribution by determining the true range high and low. The true range can either be today’s low or yesterday’s closing price, depending on the lowest figure.
Price-Based Indicators
Moving Averages (MAs)- This technical indicator computes the average of an asset’s price changes over a specific period. Doing so enables traders and technical analysts to smoothen any erroneous short-term spikes.
Momentum. This indicator computes the rate of price changes over a given period.
Relative strength index. Swing traders often use momentum indicators because they highlight possible oscillations within a wider trend. RSI is among the most famous swing trading technical strategies used to spot potential trend oscillations. It shows whether a financial market is oversold or overbought, indicating a possible upcoming swing.
RSI measures the size and number of a market’s negative and positive closes over given periods (typically 14). It is represented like an oscillator chart with numbers moving from 0 to 100. Any score above the 70-mark is considered overbought. On the other hand, anything below the 30-mark is oversold.
An overbought RSI score allows traders to go short. On the contrary, an oversold RSI opens an opportunity for traders to go long.
Moving Average Convergence Divergence (MACD). It plots the connection between two varying moving averages. MACD is a momentum following trading indicator.
Overlays
An overlay indicator is placed on top of an original asset price chart. Some of the best overlay indicators include:
Bollinger Bands. These bands use simple moving averages to plot two standard deviations and lines below and above them to create a range. Swing traders use Bollinger Bands as a trend reversal indicator.
Fibonacci retracements. This technical tool is designed to monitor resistance and support levels. They’re constructed by mapping this indicator from the lows and highs of the latest trends.
Trendline. It is a sloping line formed from multiple troughs or peaks on the asset’s price chart.
Swing Trading Technical Analysis FAQ
There’s no specific indicator that is considered best for all trading situations. However, Moving Averages are among the most accurate and popular technical indicators. You should always understand the basics before adopting your preferred technical analysis tool.
There are many swing trading technical analysis books online. You can use them to learn more about how to use these tools successfully. As a swing trader, you can also undertake a free online course to study the basics of swing trading using technical analysis.
Yes, it’s possible to swing trade without technical analysis. Some traders rely more on fundamental analysis to trade because technical indicators are lagging in nature. This is because technical indicators analyze the previous trends rather than focusing on the future.
Final Thoughts
Technical analysis plays an essential role in swing trading. One can apply these technical indicators on nearly every trading asset, allowing them to understand how the current markets are trending. As a result, they help traders understand how the trading instrument is performing and predict how it may perform in the near future. So, do not blind trade. Use technical analysis tools to inform your trading decisions.