When trading stocks, you will come across many indicators for technical analysis. Some are great, while some are just okay. This article will take you through some of the most used stock indicators for swing trading.
RELATIVE STRENGTH INDEX (RSI)
The Relative Strength Index, or the RSI, is a momentum indicator that shows overbought and oversold conditions. The RSI is an excellent indicator for spotting potential reversal points. The RSI indicator oscillates between 0 and 100. When the indicator crosses above 70, it indicates overbought conditions. On the other hand, when the indicator crosses below 30, it indicates oversold conditions.
Traders can use the overbought and oversold levels to anticipate market reversals and pullbacks. When the indicator gets to the overbought region, there is a high chance the price will reverse to the downside. Therefore, it is a good time to exit any buy positions. On the other hand, when the RSI gets to the oversold region, the price might reverse to the upside. Therefore, it is a good time to exit short positions.
At the same time, you can use RSI divergences for better reversal signals. If a bullish trend is making higher highs while the RSI is making lower highs, it indicates a bearish divergence. This shows that the trend is running out of steam and will soon reverse to the downside.
On the other hand, if the price is making lower lows and the RSI is making higher ones, it shows a bullish divergence, signaling a likely reversal.
Oversold condition
The chart above shows that the Tesla stock price dropped from its peak, creating a good shorting opportunity. However, when the RSI entered the oversold region, it showed that bears had reached an extreme, and the price could soon reverse. Therefore, the oversold condition was a signal for sellers to exit the market. Soon after this, the price reversed and started climbing.
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SIMPLE MOVING AVERAGE (SMA)
The Simple Moving Average is an indicator that shows the trend of a stock. The indicator is an average of prices over a specific period. For instance, if you decide to find the average closing prices over the last 22 days, you will have a 22-SMA.
The simple moving average allows traders to identify trends in the market. If the SMA trades below the price, it indicates a bullish trend. On the other hand, if it is trading above the price, it shows a bearish trend. Meanwhile, if it is chopping through price action, it shows a ranging market.
When the price is in a solid bullish trend, and the SMA suddenly crosses above, it signals a likely pause or reversal. The same applies to a bearish trend.
At the same time, the SMA line can act as a solid support and resistance when the price is trending. During a bullish trend, the price will pull back to the SMA support, creating a good buy entry opportunity. Meanwhile, during a bearish trend, the price will pull back to the SMA resistance, creating a good sell entry opportunity.
SMA as support
The chart above shows the Apple stock price in a solid bullish trend. The 50-SMA confirms this as it is trading below the price. As the stock rose, it had pullbacks that got the SMA line. Since this is a good support level, it created several opportunities for traders to join the rally. The trend continued until it peaked and broke below the 50-SMA. This break put the SMA above the price, showing the trend had reversed. Therefore, this was a good area for those still holding long positions to exit the market.
However, the Simple Moving Average is considered a lagging indicator since it can miss some of the most recent price changes. Therefore, it is essential to use it in combination with other indicators.
FIBONACCI
The Fibonacci retracement tool is used to identify support and resistance levels for trading opportunities. The indicator uses the Fibonacci sequence to draw levels on the chart where the price might find strong support or resistance. The most common levels include 0.236, 0.382, and 0.618.
During a bullish trend, you can draw the Fibonacci indicator from the most recent swing low to the most recent swing high. The indicator will then show levels that might act as support in case of a pullback. Here, you can enter buy positions to catch another swing of the uptrend.
Meanwhile, when the price is in a downtrend, draw the Fibonacci retracement indicator from the most recent swing high to the most recent swing low. This will plot levels that might act as resistance during a retracement, creating great shorting opportunities.
Fib retracement
The chart above shows the Fibonacci retracement indicator on an Apple stock chart. The price reached the bottom of the chart and reversed to the upside. The Fib retracement tool shows likely support levels for the first bullish swing. When the price pulled back, it found solid support at the 0.382 Fib retracement level. This created a nice buying opportunity as the price bounced higher to make new highs in the bullish trend.
However, the Fib tool alone is not enough for trading. Most traders combine it with other technical analysis tools to confirm the bounce before entering a position.
VOLUME
The volume indicator is commonly used in the stock market to show the amount of shares traded in a specific period of time. Therefore, it shows interest in a particular stock. When volume increases, traders have a high interest in the stock. On the other hand, when the volume drops, it shows low interest in the stock.
Therefore, the volume indicator shows momentum, which helps traders identify strong trends to join. At the same time, it can signal likely reversals. If the price is in a bullish trend and the volume is dropping, traders are losing interest.
Therefore, the trend might reverse to the downside. The same applies to a bearish trend. Moreover, to confirm a reversal, traders wait for a spike in volume to show new interest in selling a previously rising stock or buying a previously dropping stock.
Volume indicator
The chart above shows the Nvidia stock on a solid rally. However, at some point, the price was climbing while volume was dropping, indicating fading interest in the bullish trend. This reversal signal was confirmed when there was a sudden spike in volume on a bearish candle. This created a good opportunity for a sell position because the trend reversed to the downside.
Final Thoughts
Whether you are a beginner or a professional trader, you have to backtest these indicators before running them on your live account. Join FTMO or TradeThePool as these prop firms give you a substantial account size to handle without risking your own funds.
