What is Swing Trading, and how does it work?

Swing trading is a speculative technique in which investors purchase and hold assets to benefit from predicted market movements.

Swing traders use technical analysis to find entry (buy) and exit (sell) positions.
Gap risk is a risk that swing traders face when the price of securities fluctuates while the Market is closed.

Investors have a range of objectives when they enter the stock market. Many individuals invest for the long term to develop money, while others trade for quick gains – and many others do both. There are several trading tactics, but swing trading is one of the most approachable to newbies.

Swing trading is slower than day trading, which is incredibly fast-paced. Nevertheless, this method is an excellent way to learn about market movements while also getting a taste of technical analysis. Here’s what you should know if you’re a curious dealer.

How do Swing Traders Look at the Market?

Swing traders look for patterns in trading activity to buy or sell stocks to profit from price swings and momentum trends. They usually target large-cap companies since they are the most regularly traded.

Due to their vast trading volumes, these stocks provide investors with insight into how the Market views the firm and the price fluctuations of its securities. In addition, this active trading provides the data required for technical analysis, which we’ll discuss in the next part.

Swing trading, like every other kind of trading, is fraught with danger. Swing traders face various risks, the most prevalent of which is gap risk when a security’s price increases or falls dramatically due to news or events. At the same time, the Market is closed, whether overnight or on the weekend.

The Market will reflect any unexpected news in the starting price. The larger the danger, marketer the Market remains closed. Swing traders may lose out on longer-term trends by concentrating on shorter holding periods, as well as abrupt shifts in the Market’s direction.

Technical analysis for Swing Trading

Swing traders look for trading opportunities using technical analysis, studying statistical trends and patterns on a stock chart. Trading may be as daunting as it is dangerous because of this.

As a result, swing trading is based on technical analysis, claiming that historical trading activity and price fluctuations may predict future price changes. Swing traders analyze multi-day patterns to predict the probable direction of a stock price using several technical indicators and charts to obtain insight into market psychology.

An Example of Swing Trading in the Indian Market

Let’s look at an example of how a swing trader may evaluate Reliance’s stock and decide whether to purchase or sell it.

Reliance Swing Trading

The “support and resistance” consolidation pattern is seen in the candlestick chart above, where the Support (Entry Point) is calculated using Technical Analysis. This pattern is seen as a bullish indication.

If a swing trader wants to profit from Amazon, they would most likely buy the stock near the support level. Traders should place a stop-loss order at the most recent low.

This transaction, as can be seen, might last a few months. Some people favor this form of trading because they feel the business is an excellent long-term investment. Still, since it is accessible at a low price, they can obtain significant returns in a short period and sell when it becomes inflamed.

Why is risk management so crucial in this type of trading?

The most important aspect of a good swing trading strategy is risk control. Traders should only invest in liquid equities and diversify their portfolios across industries and capitalizations.

Each position should account for between 2% to 5% of the overall trading account capital. The most aggressive and expert traders may risk up to 10% on each deal. On average, a portfolio of five focused swing trades would account for 10% to 25% of overall trading account capital.

Having cash on hand enables you to add to your best-performing deals, resulting in bigger wins. Swing trading is all about minimizing losses, as it always is.

Stop-loss orders are an essential tool for risk management. When a stock falls below the stop price (or rises above the stop price in the case of a short position), the stop-loss order becomes a market order, which is executed at the market price.

Because the danger of each position is restricted to the difference between the current price and the stop price, the trader knows precisely how much money is at risk when stop losses are in place.

A stop loss is an excellent approach to limit risk in a single deal.

Swing Trading Strategies

Traders may use a variety of tactics based on technical analysis to decide when to buy and sell, including:

  • Bullish or bearish crossing points are sought by moving averages.
  • Triggers of support and resistance
  • Crossovers of Moving Average Convergence/Divergence (MACD).
  • The Fibonacci retracement pattern is used to identify support and resistance levels as well as possible reversals.
  • Patterns for Cups and Handles.
  • Patterns in Triangles.
  • Trading with simple Price Action.

Traders frequently use moving averages to assess the price range’s support (lower) and resistance (higher) levels. An exponential moving average (EMA) puts more weight on recent data points than a simple moving average (SMA).

To find crossing points, a trader may employ 7-, 14-, and 45-day EMAs, for example. When a stock’s price rises above, or “crosses,” its moving averages, it indicates an upward price trend. When the stock price goes below the EMAs, it is a bearish indication, and the trader should withdraw long holdings and maybe enter short ones.

Swing trading is more difficult when markets are at extremes. Actively traded equities do not display the same up-and-down oscillations within a bull or bear market range as they do in more stable market circumstances. The Market will be propelled up or down by momentum for a long time. Traders should always trade in the direction of the trend, buying long in bull markets and selling short in bear markets.

Swing Trading vs. Day Trading

Day Trading

  • Intraday Traders execute many transactions every day, and their positions may last anywhere from minutes to hours.
  • It’s a full-time job.
  • Short-term buy and sell signals are used in day trading.
  • It is based on cutting-edge trading platforms and technologies.

Swing Trading

  • Swing Trading entails making several deals over a month.
  • Positions might last anything from a few weeks to a few months.
  • It is possible to perform it part-time, and it makes use of trends and momentum indicators.
  • It’s possible to do it using a basic brokerage account.
  • There are fewer gains or losses, but they are more significant.

Successful day trading also requires a thorough grasp of technical trading and charting. In addition, because day trading is intensive and demanding, traders must maintain their composure and regulate their emotions when under pressure.

inally, day trading entails risk; traders should expect to lose 100 percent of their money at times.

Swing trading, on the other hand, does not need such a substantial collection of characteristics. As a result, swing trading is a realistic alternative for traders who want to retain their full-time employment while dabbling in the markets.

It can be done by anybody with modest investment cash and does not demand full-time concentration. In addition, swing traders should combine fundamental and technical analysis rather than relying just on technical analysis.

Best Indian Stocks for Swing Trading

Because Swing Trading holdings tend to stay longer than Intraday Trading, it’s critical to invest in fundamentally sound firms. This is because the market is unpredictable, and it is preferable to identify strong entrances in fundamentally sound firms than depend on companies that seem attractive on the charts alone.

The following are some fundamentally sound equities to swing trade-in:

  • HDFC
  • MRF
  • TCS

You may also like:


Leave a Reply

Avatar placeholder

Your email address will not be published. Required fields are marked *