An Introduction to Swing Trading

If you are thinking to begin swing trading, then this article will help you understand whether it is really your style or not.

Swing trading is a popular form of trading in which the traders hold their position for more than a day. By definition, it is polar opposite from day trading – doesn’t require traders to square off their position in a day. Swing traders usually target a larger share of the market and wait for a deal to emerge for the underlying – when it happens, they trade in the direction of the trend. Swing trading is one of the fundamental forms of trading.  But, why so?

The duration of a swing trade is more than a day but less that of trend trades, which can emerge over weeks or months. Swing trading sits in the midpoint of the two extremes, looking at profiting from short-duration price movement arising from changes in corporate fundamentals. The key to profit from swing trading lies in picking up the right stocks; stocks with a propensity to grow in short duration. Swing traders, while waiting for a larger profit to emerge, make several small wins to add to their ultimate profit. This helps them secure more substantial profit volume. But to do that, swing traders keep their stop loss level low at 2-3 percent and manage to keep the profit-to-loss ratio at 3:1. It is done to avoid risking too much. A big loss can wipe away all the small gains made from smaller swings.  To avoid making mistakes, swing traders, therefore, carefully choose the stocks.

Picking Up The Right Stocks

Picking up the right stocks is the first and crucial step of successful swing. You would need to confirm that the stocks you are selecting are in an uptrend. Secondly, the stock you select must also have volume and liquidity in the market. Large-cap stocks are deemed right for swing trading. In an active market, these stocks fluctuate by a wide range of high and low extremes. Swing traders will ride the wave and trade in the direction of the trend before switching position when the trend changes in the opposite direction.

Selecting The Right Market

Swing traders prefer a moderate market than when it is bearish or bullish. Because when the market condition is extreme, even the most active stocks functions erratically – not exhibiting the same swinging movements. This is why swing traders prefer a stable market, where indexes move within range for at least a few weeks or months.

In a stable market, without substantial bullish or bearish factors present, indexes will move in a pattern. That is rising for some time and then falling, like a wave. In between, swing traders will have many opportunities to strike profitable trades. So, a significant part of swing trading success depends on correctly identifying the kind of impulses the market is experiencing. But, what to do when the market is either bullish or bearish?

Swing Trading In A Bullish Market

When the market is rallying, swing traders play it to the trend. During a bullish phase, the trending stocks move in a gradual manner that looks like a set of stairs – there are temporary pullbacks between the upward rise before the stock starts to climb again. This is a typical formation in an uptrend. While it’s happening, swing traders in the bullish trend try to capture those short moments of dip and rise.

Capturing the tide in a bullish market depends on two things – successfully planning entry and isolating the lowest point of the pullback to put stop loss (SL) limit. An experienced trader will plan an entry while the next price candle is formed in the uptrend after the dip and place the SL limit at the lowest point of the next pullback. Next, identify the highest point in the trend, which would be your profit level. The distance between your entry point at the profit level is the size of your gain from the trade, while the difference between entry and SL point is the measure of relative risk. For a trade to be profitable, the volume of potential reward should be twice in size of the approximate loss, or the reward-loss ratio should be 2:1.

Bear Market Strategy

It’s trickier to swing trade in a bearish market than in a bull market. The reason is, a bear market is more volatile, frequently shifting depending on traders’ sentiment. However, bearish runs are short-lived than uptrend, and an underlying bullish force keeps the market from spiralling out of control. One of the bearish swing strategies suggests, trader to stay in cash or refrain from swing trading if they aren’t sure about their strategy to hold up against the ongoing market condition.

Like the bull market, the bear market has moments of fluctuations (although not as orderly). Experienced traders try to trade during these brief counter-trends when the market continues to fall.  

An entry is planned when the price is lower than the counter trend’s previous day’s low. Similarly, stop off limit is set above the highest point of the current counter trend’s highest point. When the stock price rises to that level, you exit the market to minimise your losses. Conversely, a profit target is set below the lowest price candle in the current downtrend, and you can exit the trade to book some profit when the limit is hit.

Swing Trading Strategy

Swing trading strategy is a combination of both fundamental analysis and technical analysis.

Fundamental analysis is a way to measure the intrinsic value of a stock. In fundamental analysis, traders will analyse all the factors that can affect the value of a stock, from macroeconomic factors, the company’s financial performance, economic performance, sectoral performance, and the like.

Apart from fundamental analysis, swing traders also rely heavily on technical analysis. You can read in detail about swing trading strategies and swing trading indicators to get a fair idea on both.

The Bottom Line

Swing trading means trading methodically with the trend. Swing traders don’t try to make a big profit in one shot.  They wait for the stock to hit the profit level so they could sell.  It is considered good technique for beginner traders, but if you are an intermediate or advanced trader, you can swing trade too.

Swing trading doesn’t demand too much of your time like scalping or day trading, but allows you see the profit mature over time. However, to swing trade, you would need discipline and technical understanding to make the winning deals.