Candlesticks and Oscillators for Successful Swing Trades

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Candlesticks and Oscillators for Successful Swing Trades

Candlesticks and oscillators may be used alone or in tandem to identify possible short-term trading opportunities. Swing traders are experts in using technical analysis to profit from short-term market movements. Trading these swings successfully requires the ability to properly discern both trend direction and trend strength. This may be accomplished by using chart patterns, oscillators, volume analysis, fractals, and a number of other techniques.

This post will go through how to detect swing trades using oscillators and candlestick patterns.

Key Takeaways

  • To discover prospective trades, swing trading methods might benefit from employing candlestick charts and oscillators.
  • When oscillators begin to deviate from the prevailing trend, they help detect reversals.
  • Candlestick patterns like the spinning top and engulfing patterns may assist confirm bullish or bearish mood, which swing traders can exploit.

Pinpointing a Reversal

Swing traders might search for short-term price reversals to catch future price movements in that direction. The first stage is to identify the appropriate circumstances for a reversal, which may be accomplished using either candlesticks or oscillators.

Candlestick reversals are distinguished by hesitation candles or candles that exhibit a significant change in mood (from buying to selling or selling to purchasing), while oscillators signal probable reversals via divergence.

Oscillator Divergence

When the price moves in the opposite direction of a momentum oscillator, this is referred to as divergence. Consider this in terms of physics: when you toss a ball into the air, it loses momentum before it reverses direction. This is also how stock market reversals may occur. Before stock prices revert, momentum slows. Divergence may appear when momentum is waning and a possible reversal is imminent. Divergence does not predict all price reversals, but it does predict many of them.

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Divergence is a fantastic place to start for a trade. Divergence isn’t always required, but when it is, the candlestick patterns (explained next) are more effective and tend to result in better trades.

The graphic below depicts divergence. The price was rising, but the oscillator—in this example, the relative strength index (RSI)—was falling. The divergence indicated weakness in the increase, which was also evident from the price action, as the price could just barely hit new highers before dropping again. Ultimately, the price dropped dramatically.

Image by Sabrina Jiang © Investopedia2020

The next step is to pinpoint an accurate (or as near to it as feasible) point of reversal. This activity is best completed with the help of specialized candlestick patterns. Although there are over 50 distinct candlestick patterns, we will concentrate on two of the most prevalent.

Bullish and Bearish Engulfing Patterns

Some of the most common candlestick patterns include bullish and bearish engulfing patterns. A bearishengulfing pattern is distinguished by price movement upward, which is often represented by green or white candles. Then there’s a big down candle, usually red or black, that’s bigger than the most recent up candle. The earlier up candle is entirely enveloped by the down candle, indicating that significant selling has entered the market. Trades are entered at the finish of the bearish engulfing candle or towards the beginning of the next candle.

The inverse is a bullish engulfing pattern. The price is declining, and suddenly there appears a massive up candle that envelops the previous down candle, indicating that buyers have forcefully entered the market.

Image by Sabrina Jiang © Investopedia2020
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Indecision Candles

Another typical candlestick reversal pattern is the spinning top pattern. It has a short body and lengthy tails. It demonstrates hesitation since there is volatility during the time, but by the conclusion of the term, the price has returned to where it began. While spinning tops may occur on their own and suggest a trend shift, they are more likely to appear in groups of two or three. The price will then make a considerable move in either direction and close in that direction. That is the trade-in direction.

The following chart shows examples of these formations.

Image by Sabrina Jiang © Investopedia2020

More Swing Trade Examples

Here are a few more examples that use both divergence and candlestick patterns.

The figure below reveals a significant divergence. While the price was moving above previous highs, the RSI was plummeting. After setting a new high, the price created a powerful bearish engulfing pattern and began to fall.

Image by Sabrina Jiang © Investopedia2020

In this case, indecisive candles serve to predict a short-term price reversal. At the time of the transaction, there was also a divergence. The price was rising inside a longer-term uptrend, but three days in a row saw lengthy upper tails and little movement between the open and close.

These minor versions of the spinning top have various names, but the meaning is the same if all other trading requirements are met. The price then fell sharply, followed with RSI divergence: the price had just hit a new high (before plunging), while the RSI was significantly below its preceding high.

Image by Sabrina Jiang © Investopedia2020

What Is Swing Trading?

Swing trading is a technical approach for profiting from market trend reversals that occur over many days to weeks. The idea is to join a trend and then depart when it reverses, sometimes adopting the opposing position in the hope that it will reverse again.

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How Can Technical Indicators Help Identify Market Swings?

Technical tools like as momentum indicators and oscillators may assist predict (or confirm) a market reversal by indicating that market sentiment is shifting or a trend is losing pace. These indicators search for diminishing trade volume and price patterns that suggest a pivot is approaching.

What Other Indicators Can Swing Traders Use?

The Bottom Line

Candlesticks and oscillators help traders detect swing trades quickly and easily. While the strategies may be employed alone, combining them is frequently more effective.

Divergence and these candlestick patterns do not predict all reversals; they are simply a handful of the various ways a reversal might appear. When entering any trade, use a stop loss to reduce risk. A stop loss may be put above the most recent swing high if going short, or below the most recent swing low if going long.

Investopedia does not provide tax, investment, or financial advice. The material is offered without regard for any individual investor’s investing goals, risk tolerance, or financial circumstances, and may not be appropriate for all investors. Investing entails risk, including the possibility of losing money.

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