CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75.00% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Swing traders aim to capture small price movements by holding assets for a short timeframe. While intraday traders liquidate positions within a single day, swing traders hold trades till the current momentum lasts, which could be more than a day and may even extend to several days. This is the reason their profit or loss per transaction is higher than that of intraday traders, requiring much deeper analysis of market trends.
As the name suggests, swing trading focuses on highs (when the market peaks before retracing) and lows (when the market troughs before rising). Such swings offer attractive opportunity opportunities to go short on market highs and long on lows. This strategy requires a keen understanding of technical analysis to identify market trends and the most opportune entry and exit points.
Technical analysis becomes simpler by using trading tools like indicators. Before delving into the most popular technical indicators, let’s look at the types of indicators.
Broadly speaking, there are three categories of indicators:
Trend Indicators: These indicators smooth out short-term price volatility to identify the direction of the market and whether a trend has been established.
Volume Indicators: They are very simple indicators that identify how actively an asset is being traded at a specific point in time. By doing so, volume indicators highlight the buying and selling pressure in the market.
Momentum Indicators: They help identify the strength of price movements or the rate at which the price of an asset is rising or falling. Such indicators are useful in identifying the onset of reversals.
MA is a line connecting the average closing prices over time. It adjusts continuously when new data points are added and older ones are dropped. It can be calculated over 5 days, 10 days, 20 days to even 200 days. This allows traders to consider the market direction, as the MA line removes the hourly or daily noise of price changes. A rising MA indicates that the asset is in an uptrend, while a downward sloping MA reflects a downtrend.
Swing traders make use of two MA lines:
These two MA lines are used to predict a reversal in market prices by analysing their crossover points.
A Bullish Crossover: This takes place when the fast-moving MA cuts the slow-moving MA from below. It suggests a potential shift in market sentiment from bearish to bullish. This signals an entry point for long positions or an exit point for short positions.
A Bearish Crossover: This takes place when the fast-moving MA cuts the slow MA from above, indicating a reversal from an uptrend to a downtrend. This signals an entry point for short potions or an exit point for long positions.
The RSI is a popular momentum indicator that helps traders identify overbought and oversold conditions to make better trading decisions. This indicator considers the past 14 periods, which could be days, weeks, hours or any other timeframe, as per the trader’s preference.
First, it displays whether the closing price was higher or lower than the previous close:
Then it calculates a ratio to determine the strength of these moves. The ratio assists traders in knowing if a market is overbought (multiple positive closes, suggesting a potential reversal) or oversold (multiple negative closes suggesting potential bounce-back).
The RSI ratio ranges from 0 to 100:
Swing traders must note that the RSI does not give a clear signal of market direction, as markets can remain overbought or oversold for a longer duration, especially during strong trends.
Similar to RSI, the Stochastic Oscillator is a momentum indicator. Although it uses different mathematical models to calculate the value, the information is similar to what the RSI indicates.
The Stochastic Oscillator also ranges between 0 to 100 but the overbought and oversold levels are 80 and 20, respectively.
This indicator creates two lines in the trading chart. The first is a stochastic oscillator and the other represents a 3-day moving average. The intersection of these two lines indicates a possible reversal.
EOM is designed to offer insights into the relationship between volume and price movements. Here volume refers to the extent of trading activity within a particular period, while price action is the movement of asset prices during the same period. The EOM indicator aims to analyse how changes in volume affect price action.
Traders can examine this relationship and understand the strength and sustainability of price trends.
The EOM indicator is plotted on a chart alongside the asset’s price action. The indicator fluctuates as a line fluctuating around a baseline of zero.
The EOM also helps in identifying whether market movements are being driven by the low volume of trades. If there is a steep rise or fall in the EOM line, but the volume remains low, it suggests that the current price trend is not sustainable and could potentially reverse.
It’s important to note that none of the trading tools are foolproof and may generate false signals. It’s best to use at least two indicators for good technical analysis to make better trading decisions.
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