Swing Trading With Stochastics – the Essential Momentum Indicator
Markets don't trend all the time - there are periods where they tend to be in channels, and consolidating. These are the markets where swing trading can work well.
This article is an introduction to swing trading, and highlights the best timing indicator - to time you swing trades for big profits.
What is Swing Trading?
Swing trading sits in the middle, between day trading, and trend following - and swing trades normally last a few days. The swing trader will enter a position one way, and exit with a profit - and enter a possible position the other way.
The Swing Traders Best Market
For the swing trader, it's best to trade, when a market is going nowhere fast.
Swing trading does not work in strong bull and bear markets - where price moves strongly in one direction - without a swing in the other direction, the swing trader will lose.
The problem with both swing trading, and long-term trend trading, is that success is based on identifying what type of market we're looking at - i.e. bull, bear, or a period of consolidation.
Once you've identified a market as moving in a sideways channel - then it's time to look for swing trading opportunities.
The Best Tool for Swing Traders
The best tool by far - the "stochastic indicator" - which is ideal for swing trading. The stochastic indicator is a momentum oscillator, which can warn of strength, or weakness in the market - often in advance of a final turning point.
The logic of the stochastic is based on the assumption, that when a market is rising, it will tend to close near the high - and when a market falls, it tends to close near its lows.
The Calculation
The stochastic oscillator as developed by Dr. George Lane, is plotted as two lines called %K, a fast line and %D, a slow line.
· %K line is more sensitive than %D
· %D line is a moving average of %K
· %D line gives the trading signals
Although this sounds confusing, it's actually very similar to the plotting of moving averages.
For example, take %K as a fast moving average, and %D as a slow moving average.
The lines are plotted on a 1 to 100 scale. "Trigger" lines are normally drawn on stochastics charts at the 80% and 20% levels – this indicates when markets are overbought, or oversold.
Using Stochastics
The 80% value traditionally is used as an overbought warning signal, while the 20% is used as an oversold warning signal.
The signals are most reliable if you wait until the %K, and %D lines turn upward, below 5% before buying - and in reverse, above 95% before selling.
For swing trading, look to trade the crossover confirmations.
For example, buy when the %K line rises above the %D line, and sell when the %K line falls below the %D line.
Beware of short-term crossovers that may generate false signals. The best crossover is when the %K line intersects, "after" the peak of the %D line (a right-hand crossover).
Don't worry if the above confuses you - you don't need to understand the logic. When you look at stochastics on a chart, all you're looking for is the visual signals - not the calculation behind them.
Do some research and practice, before trying swing trading with stochastics - but if you want an indicator to help you swing trade, and make some big profits - check stochastics out.
This article is an introduction to swing trading, and highlights the best timing indicator - to time you swing trades for big profits.
What is Swing Trading?
Swing trading sits in the middle, between day trading, and trend following - and swing trades normally last a few days. The swing trader will enter a position one way, and exit with a profit - and enter a possible position the other way.
The Swing Traders Best Market
For the swing trader, it's best to trade, when a market is going nowhere fast.
Swing trading does not work in strong bull and bear markets - where price moves strongly in one direction - without a swing in the other direction, the swing trader will lose.
The problem with both swing trading, and long-term trend trading, is that success is based on identifying what type of market we're looking at - i.e. bull, bear, or a period of consolidation.
Once you've identified a market as moving in a sideways channel - then it's time to look for swing trading opportunities.
The Best Tool for Swing Traders
The best tool by far - the "stochastic indicator" - which is ideal for swing trading. The stochastic indicator is a momentum oscillator, which can warn of strength, or weakness in the market - often in advance of a final turning point.
The logic of the stochastic is based on the assumption, that when a market is rising, it will tend to close near the high - and when a market falls, it tends to close near its lows.
The Calculation
The stochastic oscillator as developed by Dr. George Lane, is plotted as two lines called %K, a fast line and %D, a slow line.
· %K line is more sensitive than %D
· %D line is a moving average of %K
· %D line gives the trading signals
Although this sounds confusing, it's actually very similar to the plotting of moving averages.
For example, take %K as a fast moving average, and %D as a slow moving average.
The lines are plotted on a 1 to 100 scale. "Trigger" lines are normally drawn on stochastics charts at the 80% and 20% levels – this indicates when markets are overbought, or oversold.
Using Stochastics
The 80% value traditionally is used as an overbought warning signal, while the 20% is used as an oversold warning signal.
The signals are most reliable if you wait until the %K, and %D lines turn upward, below 5% before buying - and in reverse, above 95% before selling.
For swing trading, look to trade the crossover confirmations.
For example, buy when the %K line rises above the %D line, and sell when the %K line falls below the %D line.
Beware of short-term crossovers that may generate false signals. The best crossover is when the %K line intersects, "after" the peak of the %D line (a right-hand crossover).
Don't worry if the above confuses you - you don't need to understand the logic. When you look at stochastics on a chart, all you're looking for is the visual signals - not the calculation behind them.
Do some research and practice, before trying swing trading with stochastics - but if you want an indicator to help you swing trade, and make some big profits - check stochastics out.