Technical indicators help swing traders make sense of price action and identify potential trading opportunities. While there are hundreds of indicators available, you only need a handful to trade effectively. In this guide, we cover the seven most important indicators for swing trading.
Why Use Technical Indicators?
Indicators help you quantify what you see on a chart. Instead of guessing whether a stock is overbought, an indicator like RSI gives you a number. Instead of eyeballing the trend, a moving average shows you clearly. Indicators are tools that support your decision-making.
Important: Indicators should confirm what price action is telling you, not replace it. Always look at the chart first, then use indicators to validate your analysis. No indicator is perfect or works 100% of the time.
1. Moving Averages
Moving averages are the foundation of technical analysis. They smooth out price data to show you the underlying trend. There are two main types:
Simple Moving Average (SMA)
The SMA calculates the average closing price over a set number of periods. The 50-day and 200-day SMAs are the most widely watched by traders and institutions.
Exponential Moving Average (EMA)
The EMA gives more weight to recent prices, making it more responsive to new information. Many swing traders prefer the 20 EMA for short-term trend direction.
How to Use Moving Averages
- Trend direction: If price is above the 50 SMA, the trend is up. Below means down.
- Dynamic support/resistance: Price often bounces off moving averages during pullbacks.
- Crossovers: When a shorter MA crosses above a longer MA, it signals bullish momentum (and vice versa).
Common MA combinations: 9 and 21 EMA, 20 and 50 SMA, or 50 and 200 SMA for the "golden cross."
2. Relative Strength Index (RSI)
RSI measures momentum on a scale from 0 to 100. It tells you whether a stock is overbought (potentially due for a pullback) or oversold (potentially due for a bounce).
- Above 70: Overbought - the stock has risen a lot and may be due for a rest
- Below 30: Oversold - the stock has fallen a lot and may be ready to bounce
- Between 40-60: Neutral zone
RSI Swing Trading Strategy
In an uptrend, look to buy when RSI pulls back to 40-50 (showing the pullback has momentum but is not in freefall). In a downtrend, look to sell or short when RSI rallies to 50-60.
Avoid buying when RSI is above 70 or selling when it is below 30 - you are often late to the move.
3. MACD (Moving Average Convergence Divergence)
MACD shows the relationship between two moving averages. It consists of the MACD line, signal line, and histogram. This indicator helps identify trend changes and momentum shifts.
- MACD above signal line: Bullish momentum
- MACD below signal line: Bearish momentum
- Histogram increasing: Momentum is strengthening
- Histogram decreasing: Momentum is weakening
MACD Divergence
One of the most powerful signals is MACD divergence. When price makes a new high but MACD makes a lower high, it suggests the uptrend is weakening. This divergence often precedes reversals.
4. Volume
Volume shows how many shares (or contracts) were traded during a period. It confirms the strength of price moves. A price move on high volume is more significant than the same move on low volume.
- Breakouts with high volume: More likely to follow through
- Breakouts with low volume: Often fail and reverse
- Pullbacks on declining volume: Healthy and likely to resume the trend
- Pullbacks on increasing volume: May indicate trend change
5. Bollinger Bands
Bollinger Bands consist of a middle band (usually 20 SMA) and two outer bands that are two standard deviations away. They show you volatility and potential overbought/oversold conditions.
- Price at upper band: Potentially overbought or showing strength
- Price at lower band: Potentially oversold or showing weakness
- Bands squeezing: Low volatility, often precedes a big move
- Bands expanding: High volatility, trend in motion
Bollinger Band Squeeze Trade
When Bollinger Bands squeeze tight (become very narrow), it means volatility is low and a big move is coming. Watch for price to break out of the squeeze:
- Breakout above upper band with volume: Go long
- Breakdown below lower band with volume: Go short
The squeeze does not tell you direction, just that a move is coming. Wait for the breakout to reveal direction.
6. Average True Range (ATR)
ATR measures volatility by calculating the average range of price movement over a set period (usually 14 days). It does not tell you direction, just how much the stock typically moves.
How Swing Traders Use ATR
- Position sizing: If ATR is $2, you know the stock typically moves $2 per day. Use this to set appropriate stop losses.
- Stop loss placement: Set stops 1.5x to 2x ATR away from your entry to avoid getting stopped out by normal volatility.
- Profit targets: Use multiples of ATR to set realistic price targets.
7. Stochastic Oscillator
The Stochastic Oscillator compares the closing price to the price range over a set period. Like RSI, it moves between 0 and 100 and identifies overbought/oversold conditions.
- Above 80: Overbought
- Below 20: Oversold
Stochastic vs RSI
Stochastic is more sensitive than RSI and gives more signals. Some traders use both: RSI for the bigger picture and Stochastic for timing entries. Do not use them both expecting the same information - they measure momentum differently.
How to Combine Indicators
Using multiple indicators that confirm each other increases your odds of success. Here is a simple framework:
- Trend indicator: Moving averages to identify direction
- Momentum indicator: RSI or MACD to confirm strength
- Volume: To confirm conviction in the move
Warning: Do not use too many indicators. Analysis paralysis is real. Three to four indicators maximum. They should complement each other, not duplicate information.
Indicator Settings for Swing Trading
Default settings work well for most swing traders. Here are common settings:
- Moving Averages: 20, 50, and 200 periods
- RSI: 14 periods
- MACD: 12, 26, 9 (default)
- Bollinger Bands: 20 periods, 2 standard deviations
- ATR: 14 periods
- Stochastic: 14, 3, 3
Track Which Indicators Work for You
Pro Trader Dashboard lets you tag trades with the indicators you used. Over time, see which indicator combinations give you the best results.
Summary
Technical indicators are powerful tools for swing trading when used correctly. Moving averages show trend direction. RSI and Stochastic measure momentum. MACD identifies trend changes. Bollinger Bands reveal volatility. ATR helps with position sizing. Volume confirms moves. Master these seven indicators, and you will have a solid foundation for swing trading analysis.
Continue your swing trading education with our guides on chart patterns for swing trading and entry techniques.