As a trader, you know that moving averages are an essential part of your toolkit. But which type of moving average should you use for swing trading? In this blog post, we’ll take a look at three popular types of moving averages – simple, exponential, and weighted – and help you decide which one is right for you. Stay tuned!
What is swing trading?
Swing trading is a type of day trading that attempts to capture gains in a stock within one or two days. They use technical analysis to look for stocks, forex pairs or cryptocurrencies with short-term price momentum. They then hold on to these instruments for a period of time, usually about two days, before selling them.
Swing trading can be a great way to make money in the stock market. But it’s important to choose the right strategy and to be patient and disciplined with your trades. If you do, you can be successful and make a lot of money by swing trading.
Why moving averages are popular in swing trading?
Moving Averages can be used easily and be effective when determining trend-based varying and corrective conditions. In some instances, the swing trader uses multiple moving averages because two moving averages can act as triggers. If the short moving average crosses over the long moving average, this can trigger the long entry signal. The long day trade bias will persist until moving values are reversed and the target hits. The EUR/USD chart below displays the 200 day moving average as a support and clears trend filtering. Prices begin to approach the 200-day MA but then bounce into a longer trend.
How to master the best moving averages for day trading?
There is no accurate way of determining how the asset is moving. In some cases predicting future prices does not work out as an accurate method. This is because markets contain complex pieces that move through various triggers.
For a more accurate prediction, day traders, analysts, and investors utilize various analysis methodologies. Although the analysis methods aren’t perfect it helps day trader make the best decisions possible.
There are a few different moving averages that day traders commonly use for day trading, but the most popular ones are the 20-period, 50-period, and 200-period moving averages.
A 20-period moving average is a great tool for identifying the overall trend of the market. If the price is above the 20-period moving average, then the market is in an uptrend. Conversely, if the price is below the 20-period moving average, then the market is in a downtrend.
The 50-period moving average is another popular tool for identifying the trend of the market. However, unlike the 20-period moving average, the 50-period moving average is a bit more lagging. This means that it will take the market longer to turn when the price is above or below the 50-period moving average.
The 200-period moving average is the most lagging of all the moving averages and is therefore the least used by swing traders. However, some traders do find it useful for identifying long-term trends. Besides these periods traders often used also periods known as Fibonacci numbers. These periods are 3, 5, 8, 13, 21, 34, 55 and so on.
Which moving average crossover is best for swing trading?
There is no one “best” moving average crossover for swing trading.
Each trader will have their own preference, depending on their risk tolerance, trading style, and the markets they trade.
Some traders prefer to use shorter-term moving averages, such as the 20-period MA because they generate more swing trade signals. However, these swing trades are also more likely to be false positives.
Other traders prefer to use longer-term moving averages, such as the 200-period MA because they generate fewer signals but these signals are more likely to be accurate.
It really comes down to personal preference and what works best for you.
Entry signals based on moving averages
Moving averages can also be used to generate entry and exit signals.
The most common way to do this is by using moving average crossovers.
A crossover occurs when a shorter-term moving average crosses above or below a longer-term moving average. This is seen as a signal that the trend is shifting, and traders will often take positions accordingly.
The other entry signals generated when the price crosses above or below of moving average.
It is also common to use crossovers to exit trades.
There are two main types of moving average crossover: the Golden Cross and the Death Cross.
The golden cross
The golden cross is a bullish signal that occurs when a shorter-term MA crosses above a longer-term MA.
This indicates that the trend is shifting from bearish to bullish, and it’s often seen as a sign that further gains are on the horizon.
The death cross
This happens when the 50-day MA crosses below the 200-day MA. It’s seen as a bearish signal, and it often leads to further losses in a downtrend.
Using the MAs for defining support and resistance levels
MAs can be used as support and resistance levels. Resistance and support levels can be used for trading breakouts and mean reversion strategies. In the chart, you can see that EUR/USD price moves between 20-period SMA and 50-period SMA creating an opportunity for trading on support and resistance levels breakout or by mean reversion.
What is the best time frame for swing trading?
The most commonly used time frames for swing trading are 15 minutes, 30 minutes, 1 hour, 4 hours, and daily charts. However, shorter and longer timeframes can be useful when looking at specific patterns or assessing overall trends.
Some moving average strategies may work better on longer-term time frames like the 4-hour or daily, while others may work better on shorter-term timeframes like the 1-hour or 30-minute.
Which is better for swing trading? SMA, EMA or WMA?
There are only a few differences between the EMA, WMA, and SMA. The EMA moves very quickly and changes direction early than a WMA or SMA. The EA puts a higher value on the latest price action, which indicates price changes can be recognized sooner, as the SMA can take longer to change when the price changes. The WMA is less dynamic than EMA, but more dynamic than SMA.
The EMA is a better choice for swing trading because it gives more weight to recent price action, which is what you want when you’re trying to predict future price movements. The SMA is a better choice for long-term trend following because it smooths out the price action and makes it easier to spot overall trends.
Using simple moving average
The Simple Moving Average (SMA) is the most basic type of moving average. It is calculated by taking the average of a given set of prices over a certain period of time. The SMA is a popular choice for swing traders as it can be used to identify both short-term and long-term trends.
Using exponential moving average
The Exponential Moving Average (EMA) is a more sophisticated type of moving average that gives more weight to recent prices. This makes it better suited for identifying short-term trends. However, the EMA can also be used to identify long-term trends if the period chosen is long enough.
Using weighted moving average
The Weighted Moving Average (WMA) is similar to the EMA in that it gives more weight to recent prices. However, the weighting scheme used in the WMA is different, which some traders believe makes it better suited for identifying trends.
Examples of swing trading strategies
Some popular strategies for swing trading include – trend following, momentum trading, mean reversion, and position trading.
Trend following swing trading strategy based on Moving Averages
As the name suggests, this strategy is based on following the direction of the trend. The basic idea is to buy when prices are rising and sell when they are falling.
To do this, we will use two moving averages: a long-term one (200-period MA) and a short-term one (50-period MA). We will buy when the short-term MA crosses above the long-term MA and sell when it crosses below.
Here is a chart with an example of this strategy in action:
As you can see, this strategy can produce some very profitable results. However, there are also some losing trades mixed in. This is why it is important to use risk management with this strategy, such as stop-losses and position sizing.
Momentum strategy example for swing trading
Many traders find momentum swing trading strategies to be very successful. A moving average can help identify the beginning of a new trend, and traders can enter the market at this point to try and capitalize on the move. Similarly, traders can use moving averages to exit the market when the momentum starts to wane. Swing trading strategies tend to work well in markets that are moving quickly, as there is often more opportunity to make a profit from these kinds of moves. However, it is also important to be aware of the risks involved in momentum swing trading, as strong moves can also lead to sharp losses if the market turns against the trader. Momentum trading opportunity appears when asset price has been in a range for some period as shown in chart. After that asset price breakouts channel support and resistance levels are defined by SMA[2] and SMA[100]. The bar close where a breakout happens can be buy signal for momentum trading. Traders should always use stop loss and position management to manage trading risks.
Mean reversion strategy for swing trading
One concept that is often used by successful traders is known as mean reversion. The concept is based on the statistical principle of regression to the mean, which states that extreme values are usually followed by more moderate values.
The asset price moves from one moving average to another in a process known as mean reversion. This creates an opportunity for mean reversion trading strategies, which aim to take advantage of prices that have moved too far from their moving averages.
For example, if the price of a security is moving between the 50-period MA and the 200-period MA, a trader might enter a long position when the price nears the 50-period MA and exit when it approaches the 200-period MA. By entering at these levels, the trader is hoping to capture a swing in price as it moves back toward the other moving average.
Which indicators work best with moving averages?
There are many different indicators that work well with simple, exponential or weighted moving averages. Some of the most popular ones include the MACD, RSI, and stochastic oscillator.
Here is a chart with an example of how you can use the MACD indicator with an EMA to make a trading decisions:
As you can see, the MACD can be a very useful tool for finding momentum changes in the market.
The right asset for swing trading
The most critical aspect of a good swing trading plan is choosing an optimal stock, forex pair, or cryptocurrency. The market has a couple of key factors that should be considered while assessing a swing trading instrument: liquidity and volatility. The ideal candidate for stocks is large-cap stocks, which have the largest market capitalization, or forex and cryptocurrency pairs with large forex trading volumes. When an asset has poor liquidity or has low volume on the broker trade book it is usually hard to sell or requires significant discounts for repurchase.
Volatility can be an excellent companion for swing traders too. In a situation of price movements, there is a chance of profits.
Conclusion
Moving averages are a great tool for swing traders, but it’s important to choose the right type of moving average for your trading strategy. In this blog post, we looked at three popular types of moving averages – simple, exponential, and weighted – and helped you decide which one is right for you. Swing trading can be a successful strategy if you have the right tools and know how to use them. We hope this blog post helped you understand moving averages a little better and that you’ll subscribe to our swing trading strategies for free.
Thanks for reading!
