If you have started to explore the various stock trading options, learning how to do swing trading will help you go a long way. Swing is one of the most popular trading styles, where traders base their trading decisions on technical analysis.
In this article, we will study traders’ common swing trading strategies to discover winning deals in the market.
What is Swing Trading?
Swing traders try to profit from an asset price change quickly. They would base their decisions on market trends, using fundamental and technical analysis to identify patterns, trends, and potential movement changes quickly.
Swing traders remain invested for a short duration, like days and sometimes weeks, before striking a deal. They don’t follow market trends as often as day traders, but they are prompt in identifying shifts in the trend line and exit the market before the situation takes the opposite turn. This they do by using swing trading techniques.
How does it work?
The swing trader analyzes patterns in trading activity to buy or sell a stock to capitalize on price movements and momentum trends, typically focusing on large-cap stocks since they are the most heavily traded. Because these stocks have high trading volumes, they offer investors insight into how the market perceives the company and its security price movements. This active trading offers the information necessary for technical analysis, which we’ll cover in the next section.
As with any style of trading, swing trading carries plenty of risks. Swing traders are exposed to several types of risk, the most common being gap risk. A security’s price rises or falls significantly based on news or events while the market is closed, whether overnight or weekend.
The opening price will reflect the shock of any unexpected news. The longer the market is closed, the greater the risk. Abrupt changes in the market’s direction also pose a risk, and swing traders may miss out on longer-term trends by focusing on shorter holding periods.
What Is A Swing Trading Strategy?
Swing trading got its name because it tries to gain from price oscillation or upward or downward swings. Swing traders use an array of technical trading tools, like day traders, only for a period close to position trading.
Swing traders use popular trading tools like Bollinger Bands, Fibonacci Retracement, and moving oscillators to form strategies. Besides, traders also keep a close watch on emerging patterns in multi-day charts, such as,
- Head and shoulders pattern
- Flag pattern
- Cup and handle pattern
- Triangle pattern
- Moving Average Crossover
Advantages and Disadvantages of Swing Trading
Many swing traders assess trades on a risk/reward basis. By analyzing the chart of an asset, they determine where they will enter, where they will place a stop loss, and then anticipate where they can get out with a profit. If they are risking $1 per share on a setup that could reasonably produce a $3 gain, that is a favorable risk/reward ratio. On the other hand, risking $1 only to make $0.75 isn’t quite as favorable.
Swing traders primarily use technical analysis due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. For example, if a swing trader sees a bullish setup in a stock, they may want to verify that the fundamentals of the asset look favorable or are improving.
Swing traders will often look for opportunities on the daily charts and may watch 1-hour or 15-minute charts to find a precise entry, stop loss, and take-profit levels.
The pros of swing trading
1. The time commitment is not much-
While swing trading will keep you busier than long-term investing, compared to day trading, swing trading requires less time commitment. In swing trading, you do your technical analysis on mostly the daily timeframe, except when a trading setup is forming, and you want to step down to the 4-hourly timeframe to pick a better entry price.
So, unlike in day trading, where you get to watch your price chart all the long to analyze the data printed every 15 minutes or 30 minutes, depending on your timeframe, you spend only a few minutes at the end of the trading day for your analysis.
2. You can trade part time-
Owing to the nature of swing trading and the fact that it doesn’t take much time, you can combine it with a 9-5 job or any business that can generate constant cash flow.
The good thing is that the cash flow will help your trading psychology in no small measure. When you know that your basic needs are taken care of and you can pay your bills, you can trade with much calmness without being in haste to make money.
3. Swing trading can be very profitable-
With a good strategy and proper risk management, swing trading can be very profitable without stress. You can expect to make reasonably good returns from swing trading if you consistently implement your strategy.
On average, you can make between 10-50% per annum from swing trading, which is better than the broad market return per annum. But you must have the mental skills to stay consistent.
4. It does not tie down your capital for long–
With swing trading, you don’t get your capital tied down in a bad stock for a long time, unlike in long-term trading. If a trade is not working fine, you take a small loss and move the funds to another stock that shows a trade setup.
In other words, swing trading gives you greater flexibility in managing your funds so that your funds are working hard to make money for you at every point in time.
The cons of swing trading
1. There is exposure to overnight and weekend price gaps–
In swing trading, trades stay open overnight and, in some cases, over the weekend. So, they are exposed to overnight or weekend price gaps, which can happen when there are earnings reports or other market news during the after-hours or over the weekend. The problem with these gaps is that they render a trader’s stop loss useless. The only way to minimize the risks associated with price gaps is to trade smaller trade sizes without leverage.
2. There is the possibility of missing exceptional stocks–
Swing trading aims to profit from individual price swings. You try to enter at the beginning of a new swing and get out when a pullback starts. But in doing so, you may miss out on a great stock that would have made more money if held as a long-term investment. Examples of such stocks include Amazon, Apple, and Tesla.
3. Market timing is difficult–
Even legendary swing traders know that timing the market swings are very difficult. If it is difficult for experienced traders, how will it be for beginner traders?
4. The trading cost can easily add up–
While swing trading incurs less cost than day trading, the cost can easily add up to a huge amount, especially when compared to long-term investing, where one trade can last for many months or years.
Day Trading vs. Swing Trading
Day Trading
- Make multiple trades per day
- Positions last from hours to days
- Full-time job
- Uses short-term buy and sell signals
- Relies on state-of-the-art trading platforms and tools
- Multiple, smaller gains or losses
Swing Trading
- Make several trades per week
- Positions last from days to weeks
- Part-time
- Utilizes trends and momentum indicators
- Can be accomplished with a standard brokerage account
- Fewer, but more substantial gains or losses
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