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In the field of the Stock market, shares are traded using different methods every day. People choose to trade their money using different methods that suit their trading style and their comfort. Trading style may differ from person to person and depending on the investment goal of the individual. Swing trading is one such method of trading that is used commonly for trading.
Swing trading is a kind of fundamental trading where the positions are held by the trader for longer than a day. Price movements generally take several days and in some cases, even weeks to cause price movements. Due to this reason, it takes some time to render a significant profit. For this same reason, many traders use the Swing trading method to trade.
Swing trading is very different from day trading as intraday traders only hold their share only for a short period of time. Unlike Day traders, Swing traders do not need to square off their share within the same day. They usually target a larger share of the market and wait until they have a perfect deal. The trade is usually in the direction of the trend.
Swing trading is a fundamental form of trading. The duration of the swing trade can extend up to a week or two. Most fundamentalists prefer this method of trading to any other method. Picking up the right stock is very essential to be successful at Swing trading. Swing traders sit midpoint of the two extremes.
Swing traders in India hold on to a particular stock for a time ranging from a day to two weeks, generally. This time period is usually between the two extremes while they trade the stock depending on its intra-week or intra-month oscillations. This type of trading is suitable for people with a job because you need not devote all your time to it.
What makes Swing traders stand out is that they do not have to care about the fundamentals, of the company, the kind of product they are selling, and weirdly enough even the name of the company. Here you make the decision and choose the stock solely based on the law of supply and demand. You just have to check if the money is flowing into the stock or if the money is flowing out. And of course, be aware of the risk factors involved.
What is a Swing in the Trading System?
A swing is an up or down movement that is big enough to bring a new price level. It is not a trend but rather a movement in a trend. The swing trader aims to buy when the price falls and sell when the price rises.
This type of trading uses technical analysis to find short-term opportunities in the market. Typically, traders buy dips in bullish swings and sell rallies in bearish swings. Then they aim to profit from the retracement of these price movements using small, precise entries.
Swing trading meaning is a method of trading that attempts to capture a profit from the price swings in the market. The price swings in the market are primarily based on either one or a combination of two factors:
1) Fundamental changes in an individual company’s prospects
2) Changes in investor sentiment on a sector/industry or even the market as a whole
Typically, swing traders can last between days to several weeks. Swing traders usually hold their positions overnight and sometimes even for several days.
What are the Opportunities for Swing Traders?
Swing traders have many opportunities within a trend, but taxes and commissions can cut into profit potential. Swing trading is the skill of reading a price chart and analysing the footprint of the swing highs and lows made by the market to forecast price direction accurately.
Swing trades are usually held for more than one day but shorter than trend trades. Positions are closed out within three to four weeks.
Trend traders look for successive higher highs or lower highs to determine the trend of a security. By contrast, swing traders use various measures to quantify the short-term trend and exploit that information for profits. A swing trader might use 50-day, 100-day and 200-day moving averages (MA) to define the primary uptrend or downtrend and a secondary reaction rally or pullback within it. While there are several opportunities during each week in swing trading, not all of them will be profitable.
Which Market To Trade in Swing Trading?
Swing trading can be used in any market as long as there are identifiable swings in the assets’ price graph. But it is seen that swing trading is most beneficial when the market is trending.
Think about it. You might have a long-only swing trading strategy. And you identified a swing low too late and the price already increased by the time you entered the trade. But since you have an idea that the market is trending, the risk of taking a loss is minimized.
Financial markets typically have three prevailing long-term trends: the bear market, the bull market, or somewhere in-between. Swing trading strategy is different under each environment.
Bear Market Swing Trading
Bear market swing trading is among the more difficult for natural buy-and-sell trades. In a downtrend environment, equity market prices are decreasing in the long term. Therefore, it is not advantageous to buy a security and hold it with expectations of price appreciation. There are several strategies to circumnavigate this:
- Shorten your trade period. Instead of holding for weeks, be prepared to have quicker turnaround on securities you are holding.
- Hold more cash. Plan on holding back some capital you may otherwise be trading in the event that securities you are holding do suffer material price declines.
- Convert to options (by buying puts). Instead of buying now and selling later, the ideal position to hold if you believe prices are declining is to sell a security first, then buy it back later.
Bull Market Swing Trading
Alternatively to bear markets, bull market trading may be easier. As prices tend to appreciate during these market conditions, it’s easier to buy a security and experience a profit a short while later. However, there’s a few things to keep in mind when swing trading during bullet markets:
- Entry points are higher. After liquidating your position and capturing profits, chances are greater that general market securities are now more expensive if broad markets have appreciated. Be prepared to pay higher prices for securities.
- Bad habits are formed. It’s often said that bad trading habits are formed during bull markets. Continue to do due diligence and market research on the best securities to hold; while it may seem like every security is a winner, this won’t always be the case.
- Consider leverage. Leverage trading is not for everyone, and consider your risk appetite prior to leveraging. However, if you are confident in continual appreciation of the markets, you may be able to multiply your position through leverage.
In-Between Market Conditions
The best swing trading conditions occur when financial markets are trading sideway. When the market is transitioning between bear and bull markets or when the market is facing broad uncertainty, the best positions often present themselves for swing trading. Several items to consider include:
- Volatility is good. When markets are volatile in both directions, the best swing trades are to be had. When volatility is strictly in one direction (like in bull or bear markets), it is often more difficult to pull of trades.
- Conditions are safest. Not all swing trades work out. In the even you’re stuck holding securities, chances are that neutral market conditions will minimize your losses. Instead of being stuck with securities during strong downtrend conditions, there is often more likelihood of prices rebounding.
How Can I Start Swing Trading?
Swing trading requires upfront capital to enter into a position. It also heavily relies on charting software and a technical analysis setup. In addition, it’s advised to understand simple moving averages and trading channels to properly set up your early trades.
If successful, you can make quite a bit of money – but there’s some caveats. Swing trading often requires positions to be held for days or weeks waiting for positions to materialize. For this reason, other trading styles with quicker gain capture may yield more profit.
In addition, swing trading relies on technical analysis. Without a proper skillset, more beginning investors may have their trades go unsuccessful. Last, market conditions drive opportunity; in less than ideal markets with little volatility, swing trading will be less lucrative.
Swing trading is less risky than other forms of short-term trading. By relying on technical analysis and holding positions for a short period of time, there is lower risk that you get stuck holding an unliquidated position.
With that said, swing traders must properly identify when to enter and exit positions; if read incorrectly, there is the risk of loss of capital.