Swing Trading is a trading strategy where, traders hold their respective positions for longer than a single trading day. Here, the profits are made by banking on the changes taking place in corporate fundamentals as these changes generally require several days to cause sufficient price movements.
How Does Swing Trading Works?
- The basic strategy in Swing Trading followed by traders is to buy a strongly trending stock after its period of correction or consolidation is complete.
- Strongly trending stocks often make a quick move after completing its correction which one can profit from.
- These stocks are then sold after 2 to 7 days for a 5-25% move. This process can then be repeated. One can also play the short side by shorting the stocks that fall below the support levels.
In a nutshell, a Swing Trader’s aim is to earn money by capturing the quick moves that stocks make in their life span, and at the same time making sure that their risk is controlled by proper money management techniques.
- Flexibility- It allows the traders to take advantage of the favourable price movements in the market. Financial markets are highly dynamic and the it never moves in one direction. The swing strategy permits traders to take advantage of the natural flow of markets by making money when the market is on a rise or when it pulls back.
- Spreads risk– It helps in identifying more opportunities thereby collecting more profits (typically). This way, one can spread the risk and identify other markets setting up for further trades.
- Need not be a full time job– It is a boon for part time traders as these are the people who do trading while at work. Day traders on one hand have to stay glued to their PCs all the time, to keep a track of the market, swing traders on the other hand need not devote that much attention.
- Less hassles and breakdown– Since, swing trading need not necessarily be a full time job, it saves the traders from all the hassles and pressure of day trading.
- Small Stop Losses– In swing trading, stop losses are typically smaller compared to trades with a longer term. The stop losses on a swing trade might be 100 pips based on a 4-hour chart, while a stop loss might be 400 pips on a weekly chart as it is based upon the overall trend. This allows traders to place larger sized positions instead of extremely low leveraged ones via the longer-term trends.
- Lesser Leverage- Swing Trading does not normally allows same amount of leverage as you get in day trading.
- Longer period- The capital is tied up for a longer period in swing trading as compared to day trading. The stocks are held for several days here, whereas in day trading the positions are closed within the same trading day.
- Unpredictability of markets- Markets can make dramatic moves overnight while you’re sleeping and the market is closed. If this move is against your trade, checking your position the next morning can be shocking. Moreover, placing stops doesn’t necessarily protect you from that.
Swing trading is not for everyone. Earning profits in a short span of time requires a lot of time to be dedicated by these swing traders. Over a period of time, professional scrutiny has made this form of trading a lot more systematic in its approach. Mostly, swing trading systems take the form of stock charts. These charts aid professionals in identifying a significant pattern forming in the marketplace. Patterns such as support or resistance show that a stock is not likely to keep moving past a certain maximum or minimum price. These levels are determined by multiple factors like the stock’s historical performance as well as overall market trends.
Predicting stock prices on the basis of historical trends is not an easy task. If it was, everyone would be making a killing on the stock market, right? Well, the human behaviour can be very strange sometimes and when people blindly start following the trend, stocks can go way up or down due to herd behaviour. Investing in stocks is always risky, and thus it requires a lot of due diligence on the part of swing traders before committing their money.
There isn’t one standard way of doing the things, as every trader has his/her preferred methods and strategies of investing. Below are some of the techniques which can be considered for applying a successful swing trading strategy;
- Use technical analysis and track the price action– This is the most common and standard technique followed by swing traders. This technique helps in determining which stocks or ETFs to trade.
- Look out for company’s earnings report– Typically, swing traders are not much concerned about the fundamentals of a company like organization’s structure, about the company, business line of the company, owner, intrinsic value, news etc. However, as a trader one must remember that news does influence the price movements as it impacts investor sentiment hence, earnings report is an important factor to be taken into consideration.
- Work alongside trend– Traditionally, swing traders follow the trends, i.e., a bull trend bar in an upward market and a bear trend bar in a downward market.
- Work against the trend– Mostly, the swing traders chose to embrace the trend, however, you may choose to trade the counter trend (i.e. taking a bearish stance during an uptrend’s swing high and taking a bullish stance during a downtrend’s swing low).
- Make use of Japanese Candlesticks– Many traders find that candlestick charts are easier to understand and interpret than traditional bar charts. Use these charts to identify where there is buying and selling pressure (and intensity of the pressure) and then apply that information to your investments.
- Identify the T-Line- Identify the T-line and make use of it to make your investments decision. If a stock closes above the T-Line, there is a probability that prices will continue to rise. Whereas, if a stock close below the T-Line, the chances are prices will fall.
Whether you apply a T-Line strategy, work alongside or against the trend, use Japanese candlesticks or technical analysis, or a combination of these strategies, you will end up finding a swing trading strategy that will work best for you!
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