What is swing trading and how does it work?
Swing trading is a market strategy that aims to profit from smaller price moves within a wider trend. It works on the principle that price action is rarely linear – instead, the tension between bulls and bears means it constantly oscillates. Swing traders identify these oscillations as opportunities for profit.
By focusing on the points at which momentum switches direction, swing trading enables profit-taking across a shorter timeframe than traditional investing. And like day trading, swing traders aim to profit from both positive and negative action.
However, swing trading strategies aren’t bound by the day-trading dictum that all positions must be closed by the end of the day. Instead, they hold trades for as long as the current momentum lasts. That could be less than an hour, or it could be several days.
There are two swings that traders will watch for:
- Swing highs: When a market hits a peak before retracing, providing an opportunity for a short trade
- Swing lows: When a market hits a low and bounces, providing an opportunity for a long trade
If you open a short position at a high, you'll aim to close it at a low to maximise profit. Likewise, a long trade opened at a low should be closed at a high.
Learn more about swing trading at the IG Academy
What is a swing trading indicator?
A swing trading indicator is a technical analysis tool used to identify new opportunities. Swing traders want to profit from the mini trends that arise between highs and lows (and vice versa). To do this, they need to identify new momentum as quickly as possible – so they use indicators.
There are two types of opportunity that a swing trader will use indicators to identify: trends and breakouts. Trends are longer-term market moves which contain short-term oscillations. Breakouts mark the beginning of a new trend.
Swing traders might use indicators on almost any market: including forex, indices and shares. To start trading these markets and others, sign up for a live IG account.
Top 5 swing trading indicators
- Moving averages
- Volume
- Ease of movement
- Relative strength index (RSI)
- Stochastic oscillator
To find indicators that work with any trading strategy, take a look at our guide to the 10 indicators every trader should know.
Moving averages
Moving averages (MAs) calculate the mean of a market’s price movements over a given period. In doing so, they smooth out any erratic short-term spikes.
MAs are referred to as lagging indicators because they look back over past price action. The longer the period covered by a moving average, the more it lags. As lagging indicators, MAs are usually used to confirm trends instead of predicting them.
Source: IG charts
Source: IG charts
MAs are categorised as short-, medium- or long-term, depending on how many periods they analyse: 5- to 50-period MAs are classed as short term, 50- to 100-period MAs are medium term and 100-200-period MAs are long term. They come in two main types:
- Simple moving averages (SMAs) take all the closing prices of the given period and average them out
- Exponential moving averages (EMAs) give more weight to price action that’s closer to the current date
One popular way that swing traders use moving averages is to watch for when a market’s short-term MA crosses a longer-term MA. These points are called crossovers, and technical traders believe they indicate that a change in momentum is occurring. When a faster MA crosses a slower MA from below, it can be indicative of an impending bull move. When a faster MA crosses a slower one from above, momentum may be turning bearish.
Volume
Volume is an essential tool for swing traders as it provides insight into the strength of a new trend. The principle here is straightforward: a trend with high volume is going to be stronger than one with weak volume. With more traders buying or selling, there’s a better basis for the price action.
Volume is particularly useful as part of a breakout strategy. Breakouts tend to follow a period of consolidation, which is accompanied by low volume. Then as the breakout takes hold, volume spikes.
Ease of movement
IG’s ease of movement (EOM) indicator offers a closer look at volume by showing you how it relates to price action. Using EOM, you can identify whether market movement is being driven by a comparatively low volume of trades.
The EOM indicator is plotted on a chart with zero as the base line. When EOM rises above zero, it’s usually a sign that the market’s price is advancing with relative ease – and the further EOM rises, the more easily its price is advancing. As EOM drops below zero, it’s a sign that the market is falling with increasing ease.
Say, for example, that Microsoft stock jumps from $140 to $150 in a single day. But over this period, its EOM also spikes. The new volatility isn’t being driven by high volume , which indicates a lack of strong bull sentiment – and the potential for bears to take over
Relative strength index
Momentum indicators highlight potential oscillations within a broader trend, making them popular among swing traders. Perhaps the most widely used example is the relative strength index (RSI), which shows whether a market is overbought or oversold – and therefore whether a swing might be on the horizon.
The RSI measures the number and size of a market’s positive and negative closes over a set number of periods (usually 14). It’s represented as an oscillator: a chart that moves between zero and 100.
Anything over 70 is generally thought to be overbought, which can be a sign to open a short position. When the RSI drops beneath 30, meanwhile, it’s generally thought to be in oversold territory. This is often taken as a sign to go long.
If, for instance, a market is in an uptrend but its RSI rises above 70, the uptrend may be about to turn into a bear market. On the other hand, if its RSI remains low, the trend may be set to continue.
Learn more about RSI strategies
Stochastic oscillator
The stochastic oscillator is another form of momentum indicator, working similarly to the RSI. It compares the closing price of a market to the range of its prices over a given period.
Like the RSI, the stochastic oscillator is shown on a chart between zero and 100. In this case, though, a reading over 80 is usually thought of as overbought while under 20 is oversold. Unlike the RSI, though, it comprises of two lines. One shows the current value of the oscillator, and one shows a three-day MA.
An overbought or oversold reading doesn’t necessarily mean that a reversal is imminent – strong trends can stay in either territory for long periods. For this reason, many traders watch for when the two lines on a stochastic oscillator cross, taking this as a sign that a reversal may be on the way.
Other useful swing trading tools
Indicators alone don’t provide a complete picture of a market. So many swing traders will also use support and resistance and patterns when looking for future trends or breakouts.
Support and resistance
Support and resistance are areas on a market’s chart that it has difficulty crossing. They form the basis of the majority of technical strategies, and swing trading is no different.
When a market drops to an area of support, bulls will usually step in and the market will bounce higher again. When it hits an area of resistance, on the other hand, bears send the market down. This makes them useful spots to identify so you can open and close trades as close to reversals as possible.
The more times a market bounces off a support or resistance line, the stronger it is seen as being. If the market does then move beyond that area, it often leads to a breakout.
Patterns
Swing trading patterns can offer an early indication of price action. Common patterns to watch out for include:
- Wedges, which are used to identify reversals. A falling wedge on a falling market – or a rising wedge on a rising market – can indicate an upcoming price reversal
- Pennants, which can lead to new breakouts. They occur when a market consolidates after significant price action
- Triangles, which are often seen as a precursor to a breakout if the pattern is invalidated
- Standard head and shoulders, which can lead to bear markets. Inverse ones, meanwhile, can lead to uptrends
Learn more about chart patterns at IG Academy
How to start using swing trading indicators
- Open a live IG account to trade thousands of global markets with low spreads
- Choose from a range of powerful indicators across the IG trading platform, MetaTrader 4 (MT4), ProRealTime and more
- Identify your chosen opportunity and open your position
Or if you’d rather test the water without committing any real capital, open an IG demo account.
Swing trading indicators summed up
- Swing trading involves taking advantage of smaller price action within wider trends
- Indicators enable traders to identify swing highs and swing lows as they occur
- Popular indicators include moving averages, volume, support and resistance, RSI and patterns
