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Candlesticks and oscillators can be used individually or in combination to highlight potential short-term trading opportunities. Swing traders specialize in using technical analysis to take advantage of short-term price fluctuations. Successful trading of such swings requires the ability to accurately determine both the direction and strength of the trend. This can be done using chart patterns, oscillators, volume analysis, fractals and various other techniques.
Swing traders can look for short-term price movements to lock in future price movements in that direction. The first step is to find the right conditions for a reversal, which can be done using candles or oscillators.
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Candlestick reversals are characterized by indecisive candles or candles that show a strong change in sentiment (buy to sell or sell to buy), while oscillators highlight a potential reversal of excessive divergence.
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Divergence is when the price moves in the opposite direction of the momentum oscillator. Think of it in terms of physics: If you throw a ball in the air, it loses momentum before it changes direction. This is how shocks can happen in the stock market. Momentum is slowing ahead of a reversal in stock prices. Divergence can occur when momentum slows and a potential reversal approaches. Not all price movements are predicted by divergence, but many are.
Divergence is a good starting point for trading. A divergence doesn’t always have to be there, but if it is, the candlestick patterns (discussed next) are likely to be more powerful and lead to better trades.
The following table shows the difference. The price moved higher, but the oscillator—the Relative Strength Index (RSI), in this case—moved lower. The divergence showed weakness to the upside, which was also evident when looking at the price action, as the price barely managed to make new highs before falling again. Eventually, the price dropped significantly.
The next step is to determine the exact (or as close as possible) turning point. This task is best done using specific candlestick patterns. Although there are over 50 different candlestick models, here we will focus on the two most common.
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One of the most popular candlestick patterns is bullish and bearish absorption patterns. A bearish absorption pattern is characterized by an increase in price, usually manifested through green or white candles. Then there is a large lower candle, often red or black, that is larger than the last candle that follows. The lower candle completely envelops the previous candle, indicating that a strong sell has entered the market. Trades are made near the close of a bearish engulfing candle or near the next open.
The bullish swallow pattern is the opposite. The price drops, followed by a large up candle that envelops the previous candle, showing that buyers have aggressively entered the market.
A reversal pattern is another common candlestick reversal pattern. It is a small body with long tails. This shows indecisiveness as there is volatility during the period, but by the end of the period the price is close to the original. While reversals can occur individually and signal a change in trend, often two or three occur in tandem. Then the price will make a significant movement in one direction or the other, and
The following graph shows a strong divergence. Price broke past highs and RSI fell. Immediately after reaching a new high, the price formed a strong bearish absorption pattern and the price continued to fall.
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Here is an example where indecision candles help signal a short-term price reversal. There was also a discrepancy in terms of trade. The price moved higher in a long-term uptrend, but then had three consecutive days of long upper tails and little change between the open and close.
These small spin variations often have different names, but the interpretation is the same if all other trading conditions are the same. Then there was a strong approach to the downside, accompanied by an RSI divergence: the price had just made a new high (before falling), but the RSI was well below the previous high.
Swing trading is a technical strategy for profiting from changes in market trends that occur over periods of several days to weeks. The goal is to enter the trend and then exit when it reverses, sometimes taking the opposite position in the hope that it will reverse again.
Technical tools such as momentum indicators and oscillators can help indicate a potential market reversal (or confirm one that has occurred), signaling that market sentiment may be changing or a trend is breaking. Such indicators look for declining trading volume and price patterns that indicate a reversal may be imminent.
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In addition to the above, swing traders often use several other tools and indicators. These include Kagi charts and Gann angles, which can remove some of the noise to show the strength of existing trends. Other tools include the Accumulated Oscillation Index (ASI) and the McClellan Oscillator, among others.
Candlesticks and oscillators provide traders with a quick and easy way to identify swing trades. Although these methods can be used individually, using them together is often more effective.
Not all reversals are predicted by divergence or these candlestick patterns, these are just some of the many ways a reversal can manifest itself. When making any trade, don’t forget to manage your risk with a stop loss. If it goes short, the stop loss can be placed above the last high of the swing, or if it goes long, it can be placed below the last low of the swing.
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We will look at each of them in detail, but before we do, let’s define the term “swing trading” and why it is called that.
If you remember from our article on day trading, depending on the market being traded, a day trade is a trade that is opened and closed on the same day or in the same trading session. So, naturally, swings are trading that take place over a longer period of time than a trading session or day.
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The general definition of swing trading is a trade that lasts from several days to several months in order to profit from the expected price movement of the instrument being traded.
The increase/decrease in the price of an instrument over time rarely follows a straight “line” up or down, but occurs in a “wave” pattern where the price moves quickly in one direction and then stops before the next move in the same direction.
It is these “waves” that create bullish or bearish trends that can last anywhere from a few hours to several years depending on the time frame you are looking at.
Whenever price starts a pullback or starts a new move after a pullback, so-called swing points are created (see chart above) and so as a swing trader you aim for as close to the trend low as possible and an exit that is as close to the high as possible swings to capture as much of the trend movement as possible and is therefore called swing trading.
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Swing trading offers advantages over day trading on lower time frames, but it also has disadvantages, which we will discuss below.
In terms of disadvantages, the main disadvantage of swing trading is the lower trading frequency. When you trade, the more often you can use your advantage in the markets, the better. With swing trading, a) you tend to spend less time trading, and b) trading on higher time frames won’t provide as many trading opportunities.
To learn more about how trading frequency and expectations relate to trading performance and profitability, check out this article on day trading.
In general, the swing trading time frames you want to use are the weekly, daily, 4-hour, and 1-hour charts. Any time frame less than 1 hour is unlikely to be useful for a swing trader, as trading on such time frames requires a much more approachable approach in terms of trade management.
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