Investors and traders approach the stock market with a myriad of views and strategies. Certain investors invest for a long-time and build their wealth over the course of time while others invest for a short period and gain profits quickly. Many investors do both. There are a variety of trading strategies, but the most appealing to the newbie investors and traders is swing trading. This strategy is a great way to know about the market movements, understand them, and pierce into technical analysis.
In this article, we will give you an overview of swing trading, its strategies, parameters, and the best course to learn this strategy. But, first, let’s clear our concepts before delving deeper.
What is Swing Trading?
Swing is a speculative trading style or strategy that attempts to get hold of short to medium-term profits in a stock or any financial instrument over a period of time. This period of time can extend from days to several weeks. Investors specifically use this strategy in technical analysis while looking for trading opportunities. For analysing price patterns and trends, swing traders also use fundamental analysis.
Basically, while using this strategy, traders attempt to hold a position either short or long for more than one trading session. Note that they do not hold positions not longer than several weeks or months. It is also possible to experience swing trades during trading sessions, though these rarely occur due to extremely volatile conditions.
The chief aim of this strategy is to seize a lump of a potential price move. While certain traders seize to capture volatile stocks with a lot of movement, while other investors look out for sedate stocks. In either of the case, this strategy is the process of identification of where an asset’s or stock’s price is probable to move next, entering a position, and then capture a lump of the profits if that specific move materializes.
A swing trader captures a portion of the projected price movement then moves on to the next opportunity. Traders look for intermediate-term opportunities by using various forms of technical analysis in swing trade, one of the most sought-after forms of active trading.
How does this strategy work?
As earlier mentioned, swing traders aim to analyse patterns in trading activity to purchase or sell a stock in order to maximize on price momentum and price movements trend of stocks, chiefly pivoting on large-cap stocks because they are the ones most heavily traded. As these stocks have inflated trading volumes, they offer traders and investors an insight into how the stock market perceives the organization and their security’s price movements.
Undoubtedly, swing traders undertake plenty of risks. The most common risk is gap risk where a stock’s price can rise or fall significantly based on events and news that occur when the stock market is closed, during a weekend or overnight. The opening price is the big reveal. The longer the stock market is closed, the longer is the risk. Moreover, abrupt or sudden changes in the market also pose a high risk, and traders might miss out on long-term trends while focusing on short-term trends and short holding periods.
The Technical Analysis Role
Swing traders utilize technical analysis, the study of statistical patterns and trends on a stock chart for spotting trading opportunities. Hence, it is for this specific reason trading can become intimidating and risky as well. This type of trading is grounded in technical analysis, which assumes that past price movements and trading activity can predict future price movements. The traders use a myriad of technical charts and indicators to understand the market psychology, analysing multiday patterns for determining the likable direction of a stock price.
Swing trading strategies
For looking at actionable trading strategies, swing traders can use the following strategies:
1. Fibonacci Retracement
Traders use this strategy for identifying resistance and support levels. By using this they can also find out market reversal opportunities. The Fibonacci retracement levels of 38.2%, 23.6%, and 61.8% are credited to reveal probable reversal levels. An investor might enter a purchase trade when a stock’s price in a downward trend and then find aid at the 61.8% retracement level from its earlier high.
2. T-line trading
This strategy is used to determine the best time for entering and exiting a trade. When a stock closes above the T-line, this is an indication that the stock’s price will continue to rise. When it closes below the T-line, it indicates that the price will continue to fall.
3. Japanese candlesticks
This is a widely used strategy as this is easier to interpret and understand. Traders use distinct candlestick patterns for identifying trading opportunities.
Parameters to check out
There are mainly 5 parameters, that every swing trader must consider while swing trading:
Volume helps a trader to analyse the sturdiness of a trend. The chief reason behind this is the trend with a high volume will be way stronger than a trend with a weak volume. It is not unusual for breakouts to take place after a period of consolidation or a specific pattern on a chart; when breakouts occur, volume spikes. The volume indicator can also be used by traders to analyze stock volume.
The breakout from a chart pattern, range, reversal candlestick patterns, or resistance and support zones are essential technical tools for a swing trader. A swing trader must enter into swing trading when there is a breakout and continue until the price aimed of the pattern reaches or the trend ends. One should enter the trade when there is a breakout indicated by volume. They must look out for a breakout for entering into the position.
One of the fundamental rules of this trading is that traders must trade liquid stocks. The daily minimum you select, of course, is arbitrary, but the most accommodating example is 5,00,000 shares per day. This is backed by the reason that one can easily exit high liquidity stocks fast and with minimal risk of a loss from the bid-ask spread. Swing trading requires discipline to recognize a bad trade or potential loss, which is one of the main principles.
4. Relative Strength
One must select stocks that relatively stronger than the index or sector for this trading. This measure helps an investor in identifying both the weakest and strongest assets or securities within the financial market. Essentially, the stocks with higher or lower RS displays tend to continue going forward over a period of time.
The most important factor while selecting stocks is volatility. This factor helps us to measure or determine how much the stock or security will move. Traders can use indicators such as ATR or Bollinger bonds to gauge how volatile the stock is. You must always select a stock that are volatile in nature. Volatile stocks generate large moves and give us a comfortable stop-loss and profit window.
Swing Trading vs. Day Trading
The distinction between swing trading and intraday trading is the holding time for positions. Swing trading involves overnight holding and day trading involves closing positions before the market closes. For generalization, we can say that day trading is limited to a day while swing trade can go over several days or weeks. Generally swing intraday trading does not exist.
By holding a stock overnight, a swing trader incurs the uncertainty of overnight risks such as gaps down and up against the position. By taking this overnight risk, these traders are generally done with a small position size compared to day traders. Day traders comparatively use larger position size and a 25% day trading margin. On the other hand, swing traders have leverage or margin of 50%.
Advantages and Disadvantages
Swing traders assess trade on a risk or reward basis. By closing analysing a chart of a stock, they determine where they will enter, where to place a stop loss, and then foresee where they can exit with a profit. Due to the short-term nature of the trade, swing traders use technical analysis. Moreover, fundamental analysis can also be used for enhancing the trade. Swing traders will frequently look for opportunities on the daily charts as well as on the 1-hour or 15-minute charts to pinpoint exact entry, stop loss, and take-profit levels.
- It requires comparatively lesser time to trade than day trading.
- It increases short-term profit potential by getting hold of market swings.
- Swing traders can completely rely on technical analysis and simplifying the trading process.
- Trade positions are highly subjectable to overnight risks, and abrupt reversals cost substantial losses for the trader.
- They miss out on long-term trends while favouring short-term trends.
Best Course to lean Swing Trading: Swing Trading Full Video Course
As promised earlier, we have curated the best course for learning swing trading for our readers, which is “Swing Trading Full Video Course” by Elearnmarkets. Elearnmarkets is a renowned e-learning platform for stock market courses and feature courses that are mentored and tutored by stock market giants. It has courses in several vernaculars. Hence, it is favoured and loved by Indian stock market enthusiasts.
“Swing Trading Full Video Course” is a Hindi course tailored especially for Hindi-speaking and learning Indian traders. When you enrol in this course, you ensure that you are able to choose best stock for swing trading and gain 20-25% profit on your capital. Moreover, you enlighten yourself with the knowledge of parameters, strategies, entry and exit times, learn profitable trading through swing trade and a lot more. This is the best comprehensive course for swing trading. Learn the rules, technical analysis, fundamental analysis, and tips and tricks for day trading this world-class course.
The Financial Bottom Line
Even though swing trading involves overnight risks and disrupts, this is one of the most favourable trading strategies by investors and traders. This trading style helps investors to gain profits in a lesser time with less margin. With the right hold of knowledge and tips and tricks, one can excel in this trading style.