Swing trading strategies are one of the trusted trading techniques in the securities market that gives money as well as develop your trading skills. Though it is not as common as day trading or positional trading, yet swing trading has good prospects especially for retail traders.
What is Swing Trading?
Swing Trading is a short-term trading strategy to take advantage of price swings of a stock or other financial instruments. A swing trading position is typically held longer than a day trading position, but shorter than buy and investment strategy. In simple words, the Swing Trading strategy has a time frame of more than a day maximum of up to two weeks.
How is Swing Trading different from Day Trading?
Day trading activities last less than a day. A trader has to square off his/her position before the end of the trading session. That means if you have gone for intraday buying of stock A, you have to sell it before the trading session closes on the same day. But, in the case of swing trading strategies, you take delivery of stocks for a short period of time expecting movements in the stock prices in the near future. When the price of the stocks go up, you sell the stocks and earn profits.
How Swing Trading Works?
Swing traders use technical analysis to find stocks that are about to climb or go down in value. They are not concerned with the fundamentals of the stock. They are only concerned with trends and patterns of the stock. Swing traders often create a set of trading rules based on the technical or fundamental analysis; these trading rules or algorithms are designed to identify when to buy and sell a security. In swing trading, the traders don’t even take the intrinsic value of stock into consideration for the purpose. Because they are not concerned about the long-term prospect of the stock.
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For example, Mr. A wants to do swing trading in stock XY. For that, he is keeping an eye on the price movement and volume of the stock. As soon as he notices that the stock price has gone above a particular level, he immediately enters into swing trade by buying the stock XY. Say he holds it for the next five days and sells it at a higher level and earns a profit.
The above example shows the swing points where a trader can enter. Exits are taken by a trader in part or at one go.
Suitability of Swing Trade
To speak straight, swing trading strategies are suitable for retail or individual investors. There are two reasons for such an analysis. One, institutional investors are too large to involve in swing trades and the profits are not that big to match their investments. And next, shorter holding period that cannot allow institutional investors to indulge in the swing trade.
Swing trading strategies are suitable when the market is volatile and the stock or indices are trending either way. If the market is flat, a considerable amount of gains from the trade is not possible. So, traders look for those stocks which are highly liquid and trade volumes are great. At the same time, they tend to move considerably to a direction. That’s why they are also termed as momentum trading. There are many methods to identify the momentum of a stock or indices and their buy and sell signals. Such as rate of change of stock price, trading volume, Relative Strength Index, Moving Average Convergence Divergence etc.
Advantages of Swing Trading Strategies
Swing trading is best for those people who are a newcomer in this arena and cannot afford day trading due to lack of quick response to actionable calls.
- The main advantage of swing trading as against day trading is that you don’t have to sit before the computer all day long. Research for an hour or two would be sufficient to predict movements and swings.
- Swing trade offers one of the best risk rewards. Moreover, as the trades are of a short-term period, the investors will not have to think about blocking of capital and can utilise it optimally he wishes.
- The indices or stock movements are comparatively slower than in the case of day trading. Hence this slow pace allows a swing trader to rethink or adjust his/her strategies to the shifting market conditions.
- In swing trading, a newbie gets a chance to grasp the things slowly but steadily. He can learn about risk analysis and money management skills. Further, this will make him prepared to take on day trading where the movements are very fast.
Swing Trading Tips
Though things are not for the experienced, but newcomers who are interested in doing swing trades may take the following swing trading tips seriously.
- Study hard, understand analysis from the core of your heart before jumping into the wagon. Go through various sites and experts to build up a judgment about a stock or index.
- Create a set of trading rules based on technical and fundamental analysis. These rules are to be designed to identify the buying and selling point of security.
- Go with the stocks which are voluminous in trade. That means pick up those stocks which give liquidity and considerable price movements.
- Always trade with stop loss. Because you must have a plan B to exit the trade in case of any adverse situation.
Swing trading strategies are one of the best trading techniques in the securities market. It gives you fruitful monetary rewards at the same time helps you to develop trading skills. The risk factors in swing trading though comparatively low than day trading; still, swing trading involves a high amount of uncertainties. Swing trading algorithms do not always give you the exact results and price movement predictions; you need to be cautious and vigilant about it. So, better start with small investments till you harness things yourself.