If you are a swing trader who loves to swing trade stocks or securities, you need to first determine whether the stock or the security is trending or ranging. After knowing whether the market is trending or consolidation, you need to apply ranging indicators to the ranging market and the trending indicators to the trending market.
So the first important question that you need to ask before swing trading is whether this market is trending or not. The easiest way to determine a trend in the market is to take a look at the security chart. If you see a series of higher highs and lower lows in the chart, you know there is a trend. If not then it is ranging. In that case, you need to see clear support and resistance areas meaning the security prices clearly rises and falls between these two levels.
Now eyeballing the security chart is a subjective thing. Timeframes can affect what you see. For example, you may find the security trending on the one hour chart but when you switch to the daily chart, it maybe ranging.
As a swing trader, you should only rely on the hourly and daily charts. Anything longer is only appropriate for position traders or buy and hold investors. Now, if you are satisfied with your eyeballing the charts, you can use an indicator that can tell you about the strength of the trend.
The most popular indicator that shows whether the security is trending or ranging is the Average Directional Index (ADX). ADX actually measures the strength of the trend rather than it's direction. It oscillates between the value of 0 and 100. The standard setting for ADX is 14 days period.
If the ADX is below 20, the security is in a trading range and if the ADX is above 30, the security is considered to be trending. Readings between 20 and 30 are mostly ambiguous. When the reading is between 20 and 30, if the ADX is rising and above 20, you can take it as trending. And if ADX is falling and below 30 but above 20, you can take it as the security is in a trading range.
Without knowing the correct direction of the market, it pointless to plan a swing trade. Trending markets require a different swing trading strategy as compared to range trading markets.
Mr. Ahmad Hassam has done Masters from Harvard. Get the Ultimate Swing Trading Software FREE. Discover a Dow Futures secret that can make you rich.