Best Indicators for Swing Trading: A Comprehensive Guide

Swingers have more fun.

No, not that kind of swinging (where’s your mind?). We’re talking about swing trading, a common investment strategy and one quite different from other strategies such as day trading or position trading.

In our beginner’s guide to swing trading crypto, we examined the “nuts and bolts” of the process along with the risks and rewards before highlighting some of the main benefits and drawbacks. For those of you interested in getting your feet wet with swing trading, we even offered some practical tips to getting started, including choosing the right crypto exchange (hint: Binance) and the right automated trading bots (hint: Trality).

But now that you have a good grasp of the basics, it’s time to level up with some of the finer points of swing trading. In the following article, we’ll explore the ways in which you can (and should) use technical analysis and fundamental analysis when swing trading. The most important momentum, trend, and volatility indicators are mentioned, as are a couple of specific strategies that have proven popular with traders. And since swing trading carries a degree of risk to match its potential for returns, we conclude by thinking about the importance of stop-loss orders.

Let’s get swinging!

What is Swing Trading?

Sitting comfortably between day trading and position trading is swing trading. But what exactly is it? A speculative strategy, swing trading entails holding an asset for a period of time, typically between a few days to several weeks or even a couple of months, in an effort to capture short- to medium-term gains and thereby profit from price changes or “swings.”

The key here is being able to identify or predict an asset’s movement, ride the wave, and then exit the wave at the opportune time in order to position yourself favorably for the next wave. These routine price fluctuations or swings define markets, which rise and fall like waves. If you can spot when a market trends up or down, then you can capitalize on gains and cut your losses just as quickly. However, you don’t need perfect timing. Small gains can compound returns over time.

In the following sections, we’ll take a look at technical analysis and fundamental analysis and how a combination of these two trading methodologies can yield increased returns.

Swing Trading and Technical Analysis

Cryptocurrency market activity can be extremely volatile, meaning that swing trading within this context can be inherently profitable or risky and is therefore commensurate with market conditions themselves. Luckily, though, traders have a number of tools at their disposal that both minimize risk and ensure the best chances at profitability.

Simply put, technical analysis focuses on price and volume. By studying statistical trends, traders try to better understand the ways that supply and demand can impact changes in price, volume and volatility. Price patterns and trends based on historical performance are then used to identify signals according to things like market sentiment and psychology.

The intrinsic value of any given asset or security is largely irrelevant, while patterns and trends are key, and traders are able to carry out complex analyses thanks to a toolkit that includes various techniques and indicators (we’ll highlight five of the best ones in the next section). In fact, many crypto traders use the same technical indicators found in legacy financial markets, including Relative Strength Index (RSI) indicator, Moving Average Convergence Divergence (MACD) indicator and Bollinger Bands (BB).

Although there is disagreement as to the exact number, it’s important to bear in mind that using one indicator is insufficient when attempting to identify future price movements. On the flip side, using too many indicators can muddy the waters and prove ineffectual or even counterproductive.

Swing Trading and Fundamental Analysis

Fundamental analysis, on the other hand, is a strategy that is concerned with the intrinsic value of an asset. Through an analysis of various internal and external factors, traders aim to determine whether an asset is over- or undervalued, and the resulting information can then be used for entry or exit positions. However, crypto fundamental analysis presents certain challenges, particularly since cryptocurrency cannot be evaluated in the same ways as traditional businesses.

Given the shorter-term nature of the trades, swing traders primarily use technical analysis, which is one reason why we won’t get too bogged down in the finer points of fundamental analysis in this article (although the latter can complement technical analysis). There’s plenty of sound information out there for those interested in exploring a range of subject-specific topics, from the differences between quantitative and qualitative fundamental analysis to a comprehensive guide to cryptocurrency fundamental analysis.

Swing Trading Indicators: Leading and Lagging

Technical indicators can be grouped into two basic categories, leading and lagging. Leading indicators are designed to anticipate the future direction of a market, giving trade signals when a trend is about to start. Conversely, lagging indicators provide delayed feedback, giving a signal once the price movement has already passed or is in progress.

A classic analogy for understanding leading and lagging indicators is to think of a car: leading indicators look at the road ahead through the windshield (or windscreen) and lagging indicators look back through the rear window at the road already travelled.

Stochastic, Williams %R, On-balance volume (OBV) and Relative Strength Index (RSI) are among the most popular leading indicators, with Moving Averages (MA), Moving Average Convergence Divergence (MACD), and Bollinger Bands (BB) among the most commonly used lagging indicators. A word of caution: relying exclusively on either leading or lagging indicators will likely have negative consequences. The aim here is to strike the right balance between the two.

Let’s take a closer look at the top three leading and two lagging indicators.

Best Momentum Indicators for Swing Trading

Below are three of the best momentum indicators commonly used by profitable swing traders.

Relative Strength Index (RSI)

In order to identify whether a market is overbought or oversold, traders can use the relative strength index (RSI), which is a momentum indicator that falls under the oscillator category. When the RSI gives a signal, it is thought that the market will reverse, thereby providing a leading sign that a trader should enter or exit a position. In other words, the RSI is used primarily to help traders identify momentum, overbought and oversold market conditions, as well as divergence and hidden divergence signals in markets.

Stochastic Oscillator

One way to compare recent closing prices to the previous trading range is to use the stochastic oscillator, which assists traders in identifying the end of one trend and the beginning of another one. Based on the notion that market momentum changes direction quicker than volume or price, the stochastic oscillator can be used to predict the direction of market movements, making it a momentum indicator. The stochastic oscillator is a bound oscillator, which means it operates on a scale from 0 to 100. Anything over 80 generally suggests that the market is overbought, while a reading under 20 suggests oversold conditions.

On-balance volume (OBV)

As its name suggests, the on-balance volume (OBV) indicator uses volume changes to make price predictions. The focus for traders is on increases and decreases in volume without an equivalent change in price. The underlying logic of the OBV indicator is the notion that volume is the key force behind markets. When volume increases or decreases sharply without a concomitant change in an asset’s price, it is believed that the price will eventually increase or fall accordingly. The OBV indicator, however, can yield false signals, which can be balanced by lagging indicators.

Best Trend Indicator for Swing Trading

As they say, the trend is your friend. While there are a number of trend indicators from which to choose, the Moving Average Convergence Divergence (MACD) is among the best.

Moving Average Convergence Divergence (MACD)

The Moving Average Convergence Divergence (MACD) is an oscillator-type indicator. It is a trend-following tool that uses moving averages to determine the momentum of an asset such as cryptocurrency. Because it tracks pricing events that have already occurred, the MACD is a lagging indicator. A moving average (MA) is essentially a line that represents the average value of previous data during a predefined period. Within the context of financial markets, they can be divided into two different types: simple moving averages (SMAs) and exponential moving averages (EMAs). And the correlation between moving averages can be described as either convergent or divergent, with convergent lines gravitating toward one another and divergent ones moving apart.

Best Volatility Indicator for Swing Trading

And rounding off our list is an ideal tool for swing traders to discern volatility.  

Bollinger Bands (BB)

The Bollinger band tool is a lagging indicator used to measure the “highness” or “lowness” of a price relative to previous trades. As such, they can be helpful when determining whether the market has high or low volatility as well as overbought or oversold conditions. The logic behind the BB indicator is to show how prices are spread out across an average value, and it consists of an upper and lower band along with a middle band (i.e. a middle moving average line). Reacting to market price action, the two side bands expand when volatility is high (moving away from the middle line) and contract when volatility is low (moving towards the middle line). According to the standard Bollinger Bands formula, the middle line is set as a 20-day simple moving average (SMA), and the upper and lower bands are calculated based on market volatility in relation to the SMA, which is referred to as standard deviation.

ABCD Pattern and Swing Trading

Perhaps the most popular, most reliable, and most logical swing trading strategy is the ABCD pattern. A visual pattern consisting of three price swings, an ABCD pattern is made up of three “legs.” Two of these legs, AB and CD, match each other, while the third leg, BC, denotes pullbacks.

If we break it down even further, we see that point A represents the point at which a new prevailing trend emerges, while a market retracement occurs at point B. The next point, C, represents the point at which the initial trend resumes, while point D involves trading the next correction. Overall, the goal is to recognize the market’s rhythm despite the type of market (crypto, forex, etc.), timeframe, or market conditions (uptrend, downtrend, range-bound). Note that, depending on the market conditions, point D can signify a buy or sell point.

When looking at an ABCD pattern, the price highs and lows are represented by each letter, making it a straightforward way to visually find the requisite information quickly. Typically, there are 3-13 bars/candles between each letter, and traders can use the Fibonacci retracement tool to identify support and resistance levels (i.e., the legs between the different letters). The idea here is that if you know the length of AB, then you will also know the length of CD since the two should be the same length.

Phemex, one of the best crypto exchanges for margin trading, has a nice breakdown on ABCD pattern and how it can be used for trading success.

Zig Zag Indicator and Swing Trading

One of the common ways to identify both price trends and changes in those price trends is with a Zig Zag indicator, which is an especially useful indicator in a volatile market such as crypto.

The indicator functions according to percentage increases in price movements. In other words, let’s say that you’re interested in 15% price movements. You would set your Zig Zag indicator’s value to 15% to spot 15% price movements on the chart, which you can then use to figure out whether you want to buy or sell (you can also tweak this percentage if you want to focus on larger or smaller percentages).

Typically, the Zig Zag indicator is deployed in conjunction with the Relative Strength Indicator (RSI) and Elliot Wave indicator, among others, to spot patterns against the larger trend that do not appear in the lines of the long-term Zig Zag indicator. The keywords here are support and resistance levels rather than future trends, with traders using historical data in an effort to predict future price movements. When used in combination with other indicators, such as the ones mentioned above, certain patterns can emerge, which the trader can then leverage to their advantage.

Swing Trading and Stop-Loss Orders

With so much attention having been paid to fundamental analysis and technical analysis, or how and when to enter a position, traders can and often do forget about how and when to exit a position, which can be just as important, if not more so.

Good traders can find trade entries, but great traders know when to exit and a stop-loss order is a key tool when managing trade exits. In their book The Swing Trader’s Bible, Matthew McCall and Mark Whistler identify four rules to follow when it comes to stop loss:

1. Always choose your initial stop point before you pull the trigger to buy or sell.
2. Immediately place a stop order after taking a position.  Choosing a stop loss point but not placing an order is like riding a motorcycle with the helmet bungee-corded to the seat.
3. Determine ahead of time whether you will move your stop or (for shorter-term trades) have one only stop outstanding, after opening the position.
4. Always place stops on the opposite side of support/resistance and/or whole numbers.

If you’re interested in long-term profitability when swing trading, you need to have your eye on the destination or end point. Establishing and implementing a stop loss from the outset ensures that emotions have been removed from the trading equation before any losses or gains mount.

To put it another way: the end is the beginning.

Swing Trading Bots with Trality

The best way to trade is by actually doing it, and the easiest way to get started with automated swing trading is with Trality and Binance. As mentioned previously, traders can set up accounts quickly and easily on both platforms. After a basic KYC process with Binance and none at all with Trality, you’re ready to create your first (or next) swing trading bot.

While we’ve highlighted some of the best indicators for swing trading in this article, Trality users have access to a comprehensive range of additional indicators, which allows for unrivalled flexibility and complete customization when building a strategy for your swing trading bot.

For traders without the time or technical expertise to code a swing trading bot from scratch, Trality’s Rule Builder provides an ideal way to transform trading ideas quickly and easily into a profitable strategy using professional-grade tools. With its intuitive graphical user interface, the Rule Builder is a simple yet powerful rule-based bot creation editor, one that lets traders build and automate swing trading bots by dragging and dropping technical indicators based on boolean logic. Choose from over 100 technical indicators as well as a variety of predefined strategies.

Python gurus will prefer Trality’s Code Editor, with its full range of powerful tools and innovative features to create and backtest their algorithms. In-browser editing with intelligent auto-complete as well as in-browser debugging provide a seamless process for the development of swing trading ideas and their eventual realization as profitable swing trading bots.

And our blazing-fast, in-browser backtesting along with our proprietary Optimizer will ensure that your strategy for your swing trading bot has been fine tuned.

Final Thoughts on Swing Trading Indicators

Generally speaking, technical analysis can be used to look for trading opportunities, while fundamental analysis is useful when analyzing price trends and patterns.

The basic idea of swing trading is to figure out what the price will do when it gets to a previous swing and then hold it until the next swing. If there was a 5% increase and then a 3% pull back, for example, then the trader would go long and hold for about 5%. And swings are good for working out both stop-loss prices and take-profit prices.

As with any crypto trading strategy, whether it involves momentum trading, arbitrage, day trading, or margin trading, you should always do your own research and never risk more than you can afford to lose.