About Swing Indicators for Trading
- Swing traders use various types of indicators. Some of these indicators include the rate of change, candlestick, MACD, CCI and RSI. Each indicator gives a signal when a stock is ready to pop or drop. To understand the market, you must first know what all the acronyms mean, and their importance. Trend lines provide valuable information, and many people trade using just these.
- The acronym MACD stands for "moving average convergence/divergence." While that's quite a mouthful, it still doesn't tell you very much about the indicator and how you use it for swing trading. The MACD is an exponentially weighted moving average, the EMA. It takes into consideration older data on price, but weights the new data more heavily. In the 1960s, Gerald Appel created the MACD by using a 12-day period and a 26-day period. You determine the difference between the two periods and you have the MACD. Then you compare it to a 9-day EMA of the MACD. When the MACD goes above the 9-day EMA, it's a signal to buy; if the MACD drops below it, then sell. Sometimes, the MACD is a block chart called a histogram.
- Candlestick formations come from the prices of the stock. The top of the candlestick shows where the stock closed for the day, and the lower portion shows where it opened, if the candlestick is positive or white. A negative candlestick, usually red, indicates that the closing price was lower. Swing traders use only about 12 significant candlestick formations. The doji isn't really a candlestick, but a very short line that forms a cross. It indicates that the market opened and closed the same, and shows indecision. The gravestone doji indicates the open and close occurred at the low for the day, and indicates a falling market. For a more detailed description on these and other candlestick indicators, follow the link in the Resources section.
- The CCI is much like the MACD in that it indicates momentum. In this case, it measures the difference between the actual price as the fast indicator and a moving average for the slow indicator. You look for the price deviation from its average. If the CCI goes above the EMA (Exponentially Moving Average), it shows a buyer's market, because the momentum is upward. When the momentum drops, it's time to sell.
- If you have a chart that tracks the movement of the stock, you'll notice that there are peaks and valleys throughout. The chart may be for 6 months, and you can track major patterns for the stock. It shows one of three trends: The stock goes either up, down or sideways. A sideways stock is flat, and while it moves to peaks (resistance points) and valleys (support points), the top price throughout tends to remain level. Print out a stock chart and use a straight edge to draw a line that connects all the peaks on the chart. If the line connecting the peaks drops, that indicates a dropping market. Within the big picture, you also have short-term movement; again, it's up, down or sideways. Swing traders use that information. In a downward cycle, as the stock drops, each consecutive drop is lower. In addition, as it rises, the peaks are lower, too. A break in a trend line indicates that a shift in the price is about to occur. After you have checked other indicators, it's often a signal to go long. In a sideways market, short-term trends often repeat, and are easy ways to make quick dollars.
- RSI stands for Relative Strength Index; J. Wells Wilder first demonstrated it in his book "New Concepts in Technical Trading Systems" in 1978. It uses the average loss and average gain for 14 days. The formula is 100 minus 100 divided by 1, plus the average gain divided by the average loss. When you calculate the formula, express all losses as positives. If the RSI is over 30, the stock is about to rise. If the stock RSI drops below 70 in a bull market, it's oversold and about to drop.