Technical analysis for swing trading: A comprehensive guide

Join trading expert Christopher Tahir as he breaks down the best technical analysis strategies and indicators for swing trading, helping you refine your swing trading strategy and make informed market moves.

Every trader resonates with a particular trading style, which follows one’s routine and preferences. That said, there’s no one-size-fits-all trading style. In this article, I’ll share some methods I use in swing trading—one of the market’s most popular approaches—to help you better understand and adopt it.

Introduction to swing trading and technical analysis

What is swing trading?

Swing trading is a popular trading approach used to capture short—to medium-term price movements in financial markets. The duration may vary depending on the asset being traded. This approach allows traders to capitalize on price “swings” or fluctuations in the market. In general, assets with higher liquidity, such as CFDs, tend to enable shorter-term swing trading, like one day to several weeks.

Benefits of swing trading over other approaches

• Less time commitment to intraday trading.
• Lower stress levels due to less frequent trading, reducing the risks of being “tilted.”
• Potential for higher profits per trade compared to scalping, assuming both are using the same lot size and risk per trade.
• Ability to capture larger market moves due to the longer time frame.

Why technical analysis is critical for swing trading

Technical analysis forms the backbone of successful swing trading strategies. It provides traders the tools to identify optimal entry and exit points, recognize market trends, and anticipate potential price movements. By analyzing historical price data, volume, and various swing trading indicators, swing traders can make informed decisions on when to enter or exit positions.

However, the approach to timeframes usually differs from intraday trading. Since swing traders primarily trade with extended periods, they care more about larger potential price swings in higher timeframes, such as four hours and above (it can be up to monthly). Hence, swing traders tend to steer clear of smaller timeframes to avoid being trapped in observing smaller price actions, which they usually treat as noise.

To formulate an accurate analysis, swing traders adhere to the saying, "The trend is a friend. " They ensure they identify trends as early as possible, jump in, and ride the wave as they approach the end of the trend.  

After identifying the trend in higher timeframes, like 1-day or 1-week, traders can analyze these in smaller increments, reducing risks and improving entry points. By doing so, they maximize their potential profits and minimize their potential risks.

Technical analysis also helps swing traders in several ways

• Identifying current market trends (bullish, bearish, or sideways): This identification will prevent swing traders from making unnecessary trades.
• Spotting potential price reversals: Spotting these points will maximize traders’ potential gains as traders can select better entry points.
• Determining support and resistance levels: Knowing these levels will help traders choose when to scale in and out of their positions.
• Gauging market momentum and strength: Understanding these will give traders realistic trading expectations.

My technical analysis tools for swing trading

One of the most popular tools for swing traders is Moving Averages, which allow traders to follow the trend. Moving Averages (MAs) are averages of prices in the observed period, reducing price noise.

MAs generally work well during a clear trend, which is favorable for swing traders. However, these kinds of conditions only occur about one-third of the time, meaning that two-thirds of the time, the price actions tend to be more sideways or ranging.

To enhance accuracy, traders often combine Moving Averages with other technical indicators, such as the Relative Strength Index (RSI) and the Stochastic Oscillator, to identify potential entry and exit points. The RSI, in particular, helps measure the strength of a price trend and spot overbought or oversold conditions, making it a valuable complement to trend-following tools like MAs. However, traders should avoid relying solely on oscillators in trending markets, as they may generate misleading signals and increase risk exposure.

How to do analysis for swing trading

Assuming a trader uses a combination of MAs and the Stochastic Oscillator, one must know why certain parameters are set. For example, setting MA with 20 periods can be arbitrary. The trader needs to know where the ‘20’ comes from. By having a clearer understanding, one will be more confident in executing trades.

Setting the chart is pretty straightforward, but traders need to determine whether the same parameter will be applicable to all timeframes or whether each timeframe will use a particular parameter. For example, if I trade in the daily timeframe, I will set the parameter at 21, which measures the average of 21 days (the average number of days in a month). If I analyze the 4-hour timeframes, I will change the parameter to 30, which measures the average of 120 hours (the approximate number of hours in a trading week, depending on the asset class). The same goes for the Stochastic Oscillator if the trader uses it (I do not).

I usually combine MAs with price actions, which act as my triggers. After analyzing the price conditions toward the MAs, I will wait for the triggers using classic candlestick patterns (Engulfing, Harami, Doji, Morning/Evening Star, and more) without further complications to avoid overfitting the patterns to the prices.

Key swing trading indicators and patterns

The Simple Moving Average (SMA) 

As mentioned, I usually use Moving Averages (MAs). However, I like things to be simple. So, instead of complicating the indicator by using more sophisticated MAs, I use the Simple Moving Average (SMA).

SMA simply measures the average prices over a specific time period without further complications. I am aware that SMA can produce a slightly slower signal. However, it also tends to produce more robust signals that contain less noise.

Using the SMA to identify trends and reversals in swing trades

Trend identification using SMA is pretty straightforward. Firstly, we need to check the location of the current price (above or below the SMA). If the price is above the SMA, it indicates an uptrend. However, there’s one more thing to look out for: the SMA direction. An uptrend with an upward-slanting SMA means a confirmed uptrend, which may indicate the potential for bullish extension (see chart below).

Meanwhile, when the price position and SMA direction are contrary, it may indicate a sideways trend. In short, I usually check the price position toward the SMA and the SMA direction. A synchronized condition may indicate a tendency toward a particular direction.

However, MAs tend to experience a delay when providing the signals that determine the reversals. Hence, following the trend within longer timeframes allows traders to trade in a particular direction without exiting too early, potentially allowing for optimum profits.

Combining short-term and long-term SMAs for better signals

An easier way to monitor the movement of bigger timeframes is by adding more SMAs. Following my way to determine the timeframe, I apply 1-week and 1-month observation period SMAs to a 4-hour timeframe. This means I set two SMAs:

1. 1-week observation: 120 hours—period is set at 30 (divided by four hours). Meanwhile, if one trades the 24/7 instruments, the period should be changed to 42 (168 hours divided by four hours).
2. 1-month observation: 504 hours (21 days)—period is set at 126 (180 for the 24/7 instruments, using 30 days to calculate).

How to spot swing trading opportunities

Despite not needing to sit the entire day to spot trading opportunities, swing traders can set less frequent alerts to observe price movements. A less sophisticated method is to set alarms every four hours to run the analysis protocol. Setting the alarm depends on the duration needed to analyze. For instance, I need about five minutes to analyze, so I set the alarm five minutes before the four-hour candlestick ends.

Once the alarm rings, I will start running the protocol step-by-step. Let me list the simple protocol I use:

1. Check whether the price closes above or below the MA we observe (in my case, I use MA24).
2. Determine where MA24 is pointing (upward or downward). This step will help confirm the direction of the position we are opening.
3. Observe if a price trigger is formed. The trigger may vary, but my method uses simple candlestick reversal patterns.
4. Set the take profit and stop loss, and forget (no, not really. I regularly recheck it every couple of hours).
1. SL is very straightforward. Just use the latest swings.
2. TP is kinda tricky, depending on the trading approaches (maximizing the win rate or the risk/reward ratio)

The step-by-step process mentioned above is good when the price is already showing at the beginning of the trend and nearing its end. When the trend moves sideways, a similar approach with smaller timeframes may work. However, I do not use that approach, as frequent intraday trading can overwhelm me.

The key to successful swing trades: Candlesticks and oscillators

As mentioned above, I trade using popular candlestick patterns like the Hammer, Engulfing, and Stars patterns. Let me guide you through my approach, which can be quite meticulous and different from what can be found on other pages.

Swing trading candlestick patterns

Hammer patterns

These are single-candlestick patterns that we usually find at the top or bottom of a trend, signifying the end of a reversal or a retracement. The candlesticks I use from this category are Bullish Hammers (left) and Bearish Shooting Stars or Inverted Hammers (right).

Criteria:

1. The Bullish Hammer is preferable during a downward movement, while a Bearish Shooting Star (Inverted Hammer) is preferable during an upward movement. However, we must ensure that the candlestick follows the broader trend, not the minor trend. Doing this will increase the probability of a successful trade.

1. The size of the body does not really matter. However, in my application, the open-close position matters most. For long positions (Buy), I  prefer using candlesticks with bullish bodies (close > open), and the contrary applies for short positions (Sell).
2. Meanwhile, the wick (lower for long, upper for short positions) should be at least twice the size of the body. The rationale is to show the momentum reversal during the particular candlestick is bigger than the previous momentum.
3. Lastly, the wick (upper for long, lower for short positions) should be shorter than the body itself. This condition shows the paring momentum is still less than the overall momentum since the opening trade during the particular candlestick.

Engulfing patterns

Engulfing patterns containing two candlesticks with different poles are some of the most prominent reversal patterns in the Japanese candlestick discipline. Bullish Engulfing patterns (left) show the potential for subsequent bullish moves, while Bearish Engulfing patterns are the other way around.

Criteria:

1. Ideally, I use Bullish Engulfing when the bearish retracement is about to end or a bullish reversal is about to start. It is the other way around for Bearish Engulfing.
2. The first candlestick is the last candlestick following the previous trend. Meanwhile, the second candlestick is the contrasting candlestick that indicates the following price action.
3. The second body must at least engulf the first candlestick's body while engulfing the previous candlestick's wick (bullish: upper, bearish: lower) will be a bonus that provides extra emphasis on the direction.

Star patterns

Star patterns are some of my favorite ones because they are highly probable. For a bullish bias, I use Morning Star patterns (left), while for a bearish bias, I use Evening Star patterns (right). However, these patterns have three candlesticks, making them the most sophisticated patterns I use. They look similar to the Engulfing patterns with Doji candlesticks in the middle.

Criteria:

1. The first candlestick follows the direction from the last wave (bearish for Morning Star, bullish for Evening Star).

1. Ideally, the second candlestick is a Doji. However, through modernization and digitalization, prices can be in decimals, making the formation of perfect Dojis somewhat impossible. Hence, I made it more flexible to have a candlestick with its body less than one-third the overall size of the candlestick. Additionally, I disregard the color of this candlestick.
2. Meanwhile, the third candlestick should ideally engulf the first candlestick (Morning Star: close above the open of the first candlestick, Evening Star: close below the open of the first candlestick). 
3. However, the non-ideal condition tends to be more frequent than the ideal one, whereas the third candlestick does not engulf the first candlestick. Hence, it is important to keep these criteria in mind. To satisfy the patterns, the third candlestick must close (Morning Star: above, Evening Star: below) the half body of the first candlestick.

Risk management in swing trading

Despite being tested in actual trading, this system is not foolproof. Anyone, including myself, can still suffer losses. However, as traders, our main task is to manage the risks.

As mentioned, this system includes take profit and stop loss levels, but it is up to the traders to set them. At the same time, traders must also determine whether or not to enter the position even if “all stars align.” I usually avoid opening the position if the initial risk has been too high and significantly imbalanced with the potential rewards.

Final thoughts 

Swing trading allows traders to capitalize on big price swings. However, the risks can sometimes be too high in absolute terms. Hence, setting the risk level properly according to the traders’ risk tolerance is essential.

Practicing regularly on a demo account is essential before risking real funds in a real account. For shorter-term traders, swing trading can be daunting and challenging as it changes one’s habit of taking profit short. However, having different perspectives may help traders to improve their views on the markets.

I must emphasize that the rules I have shared are not set in stone. You can always tweak them according to your liking. However, I highly recommend you also jot down all your trades and trading strategies in a trading journal. This will make it easier for you to learn from your past trades and determine whether the tweaks can be considered an upgrade or downgrade. For example, if you want to use Bearish Hammer as a trigger, jot it down so you can track its long-term performance.