Swing trading is a widely-used trading strategy that involves holding positions for short periods, typically a few days to a few weeks. While the short-term nature of swing trading may expose you to sudden market shifts, the right tools can transform your trading experience from a gamble to a precisely calculated science. A potent weapon worth adding to your swing trading arsenal is the moving average — a trend-spotting tool that can help pinpoint the perfect moment to enter and exit a trade.
But with so many variations of moving averages, how do you know which ones are the most effective for swing trading? In this blog post, you'll discover the best moving averages for swing trading that have proven to be game-changers for swing traders.
What are Moving Averages?
Moving averages (MAs) are analysis tools that calculate an asset's continually updated average price to smooth out price fluctuations. They are computed by aggregating a certain number of past prices and dividing them by that number, resulting in a line that tracks price action on a chart.
Invaluable for swing traders, moving averages help spot market trends, with prices above the average indicating an upward trend and below a downward trend. MAs can act as support and resistance levels and signal possible entry and exit points, making them pivotal in shaping effective swing trading strategies.
5 Top Moving Average Strategies Used by Swing Traders
Several types of moving averages can be used for swing trading, each with its benefits and downsides. Here are the top five moving average strategies seasoned swing traders swear by.
Simple Moving Average (SMA)
A Simple Moving Average (SMA) is an arithmetic mean calculated over a specified number of equally-weighted price data points, creating a smoothed line that reflects price trends over time.
The SMA paints a clear graphic picture of a security's price general direction, aiding trend identification. However, its equal weighting means it reacts slower to recent price changes, potentially leading to late signals for entering or exiting trades.
Ideal timeframes for using SMA in swing trading depend on the trader's strategy, but commonly used periods include the 10-, 20-, 50- and 200-day moving averages.
Exponential Moving Average (EMA)
The Exponential Moving Average (EMA) is similar to the SMA but assigns more weight to recent price data, making it more responsive to price changes. The decrease in value between one price and the previous one is not constant but follows an exponential pattern.
EMA's responsiveness is its key advantage in swing trading as it provides faster signals for entry and exit points. Still, EMAs can be more volatile than SMAs and may generate more false signals.
Because of its sensitivity to recent price changes, traders often use EMAs in shorter timeframes. The 12-day and 26-day EMAs are great for short-term trends, while the 50-day and 200-day EMAs are used to assess longer-term trends.
Weighted Moving Average (WMA)
The Weighted Moving Average (WMA) lends more importance to recent prices, similar to the EMA, but with a different weighting method. The most recent price in the WMA calculation receives the highest weight, with the weight decreasing for older data points according to the weighting factor.
This weighting method makes the WMA react faster to price changes, possibly giving earlier entry and exit signals. However, this heightened sensitivity may also lead to increased volatility and false signals.
The best timeframes to use WMA are typically shorter due to its sensitivity to recent price fluctuations. The 10-day and 20-day WMAs are commonly used for short-term trends, whereas the 50-day and 200-day WMAs may be more suited for longer-term trend analysis.
Moving Average Convergence Divergence (MACD)
The Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that tracks the relationship between two moving averages of a security's price, typically a 12-period EMA and a 26-period EMA.
MACD provides swing traders with signals for potential buy and sell opportunities. It reflects not only price trends but also momentum, giving you more information to support decisions. However, MACD can produce false signals in a choppy, sideways market and may lag in volatile markets.
While MACD can be used in various timeframes, swing traders tend towards daily and weekly charts. Shorter-term traders might prefer 5-minute or 15-minute charts, but these often increase the likelihood of false signals.
Linear Weighted Moving Average (LWMA)
The Linear Weighted Moving Average (LWMA) assigns greater weight to recent data in an arithmetic progression. The most recent price has the most significant impact on the LWMA with weighting dropping in a linear fashion.
The LWMA offers swift responses to price changes, which can provide earlier signals for trade entries and exits. This, however, can also produce more false signals in volatile markets, a potential drawback for traders.
While LWMA can be applied to various timeframes, shorter periods like 10-day and 20-day LWMAs are commonly used for short-term trends in swing trading. The 50-day and 200-day LWMAs are often used for observing longer-term trends.
Crafting Your Swing Trading Strategy With Moving Averages
Moving averages are the go-to tools for swing traders, helping them identify market trends, determine entry and exit points and understand market momentum. Each has its strengths and weaknesses and reacts differently to market changes. The best moving average for you depends on your swing trading strategy and risk tolerance. It's important to combine moving averages with other technical indicators and fundamental analysis to improve your chances of trading success.
Frequently Asked Questions
Is EMA or SMA better for swing trading?
Both EMA and SMA can be effective for swing trading, depending on your trading style and timeframe. EMAs respond to market changes faster, making them a popular choice for short-term swing traders. SMAs are slower to respond but can be more reliable over longer timeframes.
What is the #1 rule for swing trading?
The #1 rule for swing trading is to use a stop loss. This process helps limit your losses and safeguard your capital if the market moves against you.
How long should you hold a swing trade?
How long you hold a swing trade depends on your trading style and strategy. Some swing traders hold positions for a few days while others hold positions for a few weeks. It’s important to have a clear exit strategy in place before entering a trade and to stick to your plan.
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About Anna Yen
Anna Yen, CFA is an investment writer with over two decades of professional finance and writing experience in roles within JPMorgan and UBS derivatives, asset management, crypto, and Family Money Map. She specializes in writing about investment topics ranging from traditional asset classes and derivatives to alternatives like cryptocurrency and real estate. Her work has been published on sites like Quicken and the crypto exchange Bybit.