An overbought or oversold reading doesn’t necessarily mean that a reversal is imminent – strong trends can stay in either territory for long periods. For this reason, many traders watch for when the two lines on a stochastic oscillator cross, taking this as a sign that a reversal may be on the way.
Other useful swing trading tools
Indicators alone don’t provide a complete picture of a market. So many swing traders will also use support and resistance and patterns when looking for future trends or breakouts.
Support and resistance
Support and resistance are areas on a market’s chart that it has difficulty crossing. They form the basis of the majority of technical strategies, and swing trading is no different.
When a market drops to an area of support, bulls will usually step in and the market will bounce higher again. When it hits an area of resistance, on the other hand, bears send the market down. This makes them useful spots to identify so you can open and close trades as close to reversals as possible.
The more times a market bounces off a support or resistance line, the stronger it is seen as being. If the market does then move beyond that area, it often leads to a breakout.
Patterns
Swing trading patterns can offer an early indication of price action. Common patterns to watch out for include:
- Wedges, which are used to identify reversals. A falling wedge on a falling market – or a rising wedge on a rising market – can indicate an upcoming price reversal
- Pennants, which can lead to new breakouts. They occur when a market consolidates after significant price action
- Triangles, which are often seen as a precursor to a breakout if the pattern is invalidated
- Standard head and shoulders, which can lead to bear markets. Inverse ones, meanwhile, can lead to uptrends
