Swing trading is a style of trading where you buy or short a stock anywhere from a couple of days to a couple of weeks. It sits in the middle of day trading and trend trading.
When you day trade you can hold a stock for a couple of minutes but never more than a day. Trend trading is usually a couple of weeks to a couple of months. Swing trading on the other hand sits right in the middle.
The idea behind swing trading is to make a lot of small wins that add up to significant returns. For example, other traders may wait five months to earn a 25% profit, while swing traders may earn 5% gains weekly and exceed the other trader’s gains in the long run.
Why Swing Trade
There are three trends in the markets: Primary, Intermediate & the Minor trend. This minor trend is nothing but a momentum in the stock price which on an average lasts for 5-7 days.
These moves could be from 5% to 8% of stock price and can be caught by using technical analysis parameters. To pocket this minor trend, we need to use swing trading techniques.
Trend trading may promise greater profit potential if the trader can catch a primary trend over weeks or months, but few traders actually have the discipline to hold a position for that long without succumbing to distraction.
On the other hand, while day trading may be more intense and exciting, buying and selling dozens of stocks each day usually proves overwhelming for the majority of traders who employ the strategy. Thus, swing trading is a happy medium between these two extremes.
Factors to Watch
A trader’s job is no less than any other profession, so if you strive to be a successful trader, it is necessary that you gain a decent amount of knowledge before putting your hard earned money on the line.
Every trader spends months of studying and research before actually entering into a trade. An understanding of the basics will also help you figure out what style of trading best suits you.
For the most part, you will be looking at blue-chip or large-cap stocks. These stock’s price will vary from a high to low and have a relatively low chance of completely crashing as a mid or smallcap stock does.
Swing traders generally avoid flat markets, which is why some people call swing trading as momentum trading. For a swing trader the basic premise for any trade is that trend is your friend.
There are many methods adopted by traders to identify a trending stock, like using the ADX (average directional index), moving average convergence divergence (MACD) or fast moving averages.
Swing traders can use the following strategies to look for actionable trading opportunities:
The very first thing you need to do is chart the stock. If you’ve done the research that we talked about above, then you’re 90% done with this. Charting the stock acts as a double check for what you already believe to be true.
PL Mobile App and PL ODIN Diet terminals provide you with live charting combined with a multitude of indicators.
Before you even start looking at individual stocks, you need to know what you’re looking for. In swing trading, it’s all about patterns.
There is tons of value in understanding things like SMA, EMA, RSI, MACD, overhead supply, and dozens of other market indicators but some of the more popular ones are mentioned below:
Our first preference is for EMAs (Exponential Moving Averages): Historical analysis has proven that a market favourable to swing trading is one in which liquid stocks tend to trade above and below a shared baseline value. This value is often shown on a chart with an exponential moving average (EMA).
Once the swing trader has used the EMA to identify a desired stock’s typical baseline, the trader can then adjust the swing strategy to the long or short, depending on the direction of the trend. Conventional swing trading strategy dictates going long at the baseline when the stock is trending up and short at the baseline when the stock is trending down.
Stochastics are also a powerful tool indicating oversold and overbought points to make entries.
Traders can use a Fibonacci retracement indicator to identify support and resistance levels. Based on this indicator, they can find market reversal opportunities.
The Fibonacci retracement levels of 61.8%, 38.2%, and 23.6% are believed to reveal possible reversal levels. A trader might enter a buy trade when the price is in a downward trend and seems to find support at the 61.8% retracement level from its previous high.
Traders use the T-line on a chart to make a decision on the best time to enter or exit a trade. When a security closes above the T-line, it is an indication that the price will continue to rise. When the security closes below the T-line, it is an indication that the price will continue to fall.
Most traders prefer using the Japanese candlestick charts since they are easier to understand and interpret. Traders use specific candlestick patterns to identify trading opportunities.
There is also the Volume Spike strategy, Gap Re-Mount strategy, and the Rubber Band strategy, amongst others. If you wish to learn more, there is tons of stuff on the internet – for instance, https://in.tradingview.com/scripts/swingtrading/
We however advise that one should always use the ADX indicator to determine whether a trend exists in conjunction with others.
Through analysis, experience, and trial and error, you can figure out which swing trading strategies work best for you-there is sure to be a swing trading strategy that you find useful, exciting, and efficient.
Once a filter is run to sieve out trending stocks the next step is to look out for a correction against the trend. The general belief is that a strong trending stock will not move in a single line but will pause in between, known as corrections and then move in the direction of the trend.
A swing trader intends to capitalize on the point from where the stock will again move in line with the trend.
In order to make money swing trading, you need to be able to do your research, spot opportunities, and most importantly follow your rules. Swing trading, or any stock trading in general, is, for the most part, a mental game. Being able to control your thoughts and follow your process will increase your returns exponentially.
Swing traders should normally trade with a 1:3 or above risk reward ratio. Others use a percentage profit target of say 5 percent for part target and 10 per cent for the remaining so ensure that your techniques allow for this profitability else the trade should not be taken.
The entry price on the trade and the reward compared to the risk needs to be at the top of your mind before your capital is put at risk with a decision to buy or sell. Stop loss levels are absolutely critical to maintaining capital preservation.
Swing traders often have a daily or weekly routine of scanning for trading opportunities in the market. Scanning can generally be done on PL Mobile App (Download at Google Playstore or Applestore) which offers a range of ideas including OI Buildup, RSI or EMA breaks, Volume and Price buildup, and Pivot supports/resistance etc in its scanner section.
Loss is always possible, even with the best swing trading candidate. Set your position size in accordance with your trading plan, which should put an absolute ceiling on your position size and set a maximum percentage of capital you’re willing to lose on a single trade and for the entire portfolio.
Setting rules may be the easiest part of swing trading. Actually following them though, is a constant mental battle. Keeping a trade log keeps you accountable. It allows you to recall every trade and learn from your wins and losses.
In conclusion, Swing trading is exciting and dangerous. You wouldn’t be the first and you won’t be the last. Your goal is to preserve capital and make that money grow which can be done through a good amount of learning, following simple risk management rules and constantly adapting to market trends.
Prabhudas Lilladher presents a wide range of trading options to you – if you are a do it yourself trader, use our Mobile App or if you like to take advice, join us on our Telegram group – @PLIndiaOnline where we constantly give out of Swing calls apart from others. In addition, our Algo Desks provide a range of strategies ranging from intraday to swing trading (https://www.plindia.com/TradersEdge/) via our Traders Edge Algo systems and you may choose to subscribe to these calls by emailing us at email@example.com
You may also write in to us at firstname.lastname@example.org to participate in any of our training sessions or visit https://www.plindia.com/placademy/ to see what other sessions you may be interested in!