What is Swing Trading – Its Strategies, Setups

 

What is Swing Trading – Its Strategies, Setups

Swing Trading

Swing trading is a short-term stock trading style. It mainly benefits individuals who wish to accumulate wealth by trading stocks for a short period of time. Swing trading has the potential to provide huge returns; however, it comes with its own set of risks.

Swing traders hold their positions as per the market trend. By taking advantage of the short-duration price movements, swing traders trade their stock strategically in a bid to earn substantial profits.

Read on to know more about swing traders and their trading strategies. 

What Is Swing Trading?

Swing trading is a technique used by stock market traders in which they open and hold a position for more than one trading session but not longer than a few weeks or a couple of months. Swing traders buy and sell stocks methodically based on technical and fundamental analysis along with studying market price trends and patterns to gain short-term profits. 

These traders mostly look out for undervalued stocks to invest in. Swing traders aim to capture a chunk of the potential price move. They do a thorough analysis of where an asset’s price is going to move next. Based on that they enter and hold a position in a bid to capture a substantial chunk of the profit, in case the move materialises. 

Once captured, swing traders move on to the next opportunity following the same pattern.

What is Swing Trading in Stock Market Parlance?

Traders operating in stock markets undertake swing trading to fulfil their short to medium-term goals. They buy financial securities that show signs of a bull run and sell them after a few days or weeks when their prices reach a peak. 

Swing traders use both fundamental and technical analysis as it helps them to understand the intricacies of the stock market. Technical analysis involves looking at the charts, graphical representations and tables to understand the price and volume trends of the market. It also gives a fair idea about the type of swing trading stocks a trader should go for. 

Additionally, fundamental analysis is a procedure that swing traders use to know the intrinsic value of the financial instrument in which they are investing. They analyse various aspects of a stock such as its financial parameters, recent performances, future predictions, objectives and strength of the competitors. 

One needs to be well versed in fundamental and technical analysis if he/she wishes to opt for swing trading. 

Day Trading vs Swing Trading

In case of day trading, traders buy and sell their stock within the same trading day, and in swing trading, they buy and hold their position for a few days or a few weeks. Swing traders usually look for an emerging trend to generate profits.

Day trading requires more expertise and knowledge about the working of the markets than swing trading. Day traders invest a greater amount of time than swing traders in analysing the price fluctuations in the market. On the other hand, swing traders are mostly on the lookout for an emerging trend. 

Swing trading comes with overnight risks, i.e. any overnight event that has the capability to influence the prices of stocks and lead to huge losses. In day trading, one can close his/her position before the end of the day, so he/she is immune from these risks. 

Day trading is quite expensive as it requires sophisticated software and hardware. These tools and equipment help individuals to lock their position efficiently. On the other hand, swing trading does not require these systems and applications.    

How Does Swing Trading Work?

Swing trading is a strategy that traders adopt to maximise profits and achieve their short to medium-term goals. They hold their position for more than one day, which is different from day traders.

In swing trading, one looks for an undervalued stock through technical or fundamental analysis. These stocks are on the verge of reaching their true potential or are in for a bull run. Traders may choose different stocks depending on their risk appetite. 

A swing trader may choose a small cap stock which may give superior returns but is unpredictable. On the other hand, he/she can also go for any large cap stock, which will provide decent returns at low risk. 

Suppose Mr Yadav is an experienced trader who has been studying the market trends of Company ABC. The current trading price of ABC’s stock is Rs. 750, and he thinks that within a month, it will jump to more than Rs. 875. Hence, he buys 100 shares at a value of Rs. 7,50,00 

At the end of the month or after a few weeks, the price of ABC’s stock hits Rs. 850. By selling the stock at Rs. 850 per share, he earned a profit of Rs. 1,00,00, thus generating a lucrative amount from his swing trade. 

Swing Trading Setups

It is important to formulate a strategy on how you want to go about your trade. For that, you must have various tools and techniques at your disposal. For starters, you can make a list of the best swing trade stocks on the basis of their past data. After this, you can use fundamental and technical analysis to select the stock which you wish to trade in. 

After selecting the stock, you can create a pricing strategy with stop loss targets. There must be an entry and exit point while undertaking swing trading. The money management tools at your disposal will help you efficiently mitigate the risks associated with swing trading

Assets to Look Out for in Swing Trading

You can go for a number of assets in swing trading. Here is a list of assets that you can choose from: 

Shares 

Bonds

Derivatives

Commodities 

Currencies 

Swing trading is a risky venture; however, one can negate or reduce the risks associated with it by going for diversification across the asset classes. For example, traders can create a portfolio consisting of technology stocks, automobile stocks, ETFs, and developed and emerging market equity segments. 

How Does Technical Analysis Help in Swing Trading?

Swing trading is all about identifying the right time to enter and exit your position in the market. Technical analysis can help traders in this regard – there are various swing trading indicators one can use for identifying the stock and their timing.

One of the most popular indicators used by traders has been moving averages. Others include moving average convergence divergence indicator, stochastic indicator, on balance volume, relative strength indicator, etc.  

You can get some hints about swing highs and swing lows using one indicator, and if the same signal is given by other indicators as well, then you can go ahead with your plans. However, you must avoid using excessive indicators as they may give confusing signals and complicate your trading strategy. 

List of Swing Trading Strategies

Here is a list of best swing trading strategies:

1. Fibonacci Retracement

Fibonacci Retracement tactic involves using the Fibonacci numbers for analysis. It helps traders identify the price support level and resistance capacity of a particular stock.

2. Trend trading

Under this, a trader looks out for the prevailing market trends. They base their targets and decisions depending on market trends and momentum in that particular asset. Individuals use a number of indicators to identify the market pattern.

3. Simple Moving Averages or SMA

These tactics use the moving average price of assets over a particular period of time. SMA creates a line or a pattern which gives signals to the traders. A trader will use a 10 day (shorter) and 20 day (longer) moving averages line to identify the signal.

Both these lines are compared to each other, and in case the shorter line crosses the longer one, it denotes a ‘buy’ signal. Similarly, if the longer line crosses the shorter one, it denotes the sign of selling.

4. Relative Strength Index (RSI)

The value of RSI ranges from 0 to 100. It gives a signal about market patterns, current conditions and any warning about an asset’s price. Traders closely follow this index and set targets accordingly.

Pros and Cons of Swing Trading

1. Advantages of swing trading:  

Huge profits: These trading techniques have the potential to generate huge returns for their investors. 

Fewer trades: One has to undertake lower trade volume than day traders. This restricts the number of losses. 

Less costly: As one undertakes lower trading volume, he/she incurs a lesser amount of trading costs like brokerage charges, STT, etc. 

2. Disadvantages of swing trading:  

Overnight or weekend risk: Unlike day trading, swing trading involves holding one’s position for more than one day. This exposes them to overnight or weekend risk. 

Stock split: Traders may be facing huge losses if the company whose stocks they are holding decide to split their stock. 

Final Word

Swing trading strategies have started gaining popularity among the new generation of traders because of the lucrative profit it offers. However, individuals planning to take a plunge must gain requisite knowledge about how to use technical and fundamental analysis. They should be careful while engaging in swing trading because of its volatility. 

Wiseinvesting

Growth with knowledge