The price of a stock often travels in a series of highs and lows. A swing trade is based on the price movement created by these highs and lows. Swing trading is based on identifying momentum, where it's headed, and the possible reversal points.
Everyone has heard of day trading. The stock market sharks get spectacular gains in a day or two. But how many people have heard of swing trading? How many people know what it is and what you can use it for?
- 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 is a swing in the trading system?
- What is Swing Trading?
- Know How Swing Trading Works
- Advantages and Disadvantages of Swing Trading
- Pros & Cons
- What Are Some Indicators or Tools Used by Swing Traders?
- Which Types of Securities Are Best-Suited for Swing Trading?
- Day Trading vs. Swing Trading
- Swing Trading Tactics
- What is Swing Trading?
Swing trading is a form of trading where traders hold positions in a given stock for longer than one day. The stocks are held for a few days or even a few weeks. This form of trading is popular in the Indian stock market.
It attempts to capture gains in an asset over a few days to several weeks. Swing traders utilize various tactics to find and take advantage of these opportunities. The concept of swing trading is based on the premise that after security has risen or declined to a certain extent, the price may be due for a reversal. It is similar to the idea that a rubber band can only be stretched so far before it must snap back.
Swing trading is a speculative activity in financial markets where a tradable asset is held for between one and several days to profit from price changes or 'swings'. A swing trading position is typically held longer than a day trading position but shorter than buy and hold investment strategies that can be held for months or years.
The critical part of swing trading is that you must have good risk management to prevent losses from turning into bigger ones. This means having stop-loss orders in place before entering any trade and being willing to exit quickly when these orders are triggered.
- Know How Swing Trading Works
If you wish to trade in stocks, you should be aware of what is swing trading. Stocks rise and fall in price and this forms the basis of trading. Here’s how the method works:
- Trends and Patterns: The first strategy that swing traders employ is understanding trends and patterns of stock prices. This is done so that traders can find stocks/assets that are going to drop or rise in price.
- Swinging Up or Down: In case traders think a stock is going to ‘swing’ upwards, that is, face a price rise in the next few days, traders buy the stock. They will sell it before it starts to drop or swing downwards.
- Weighing Potential Risks: When traders want to know what to look for when swing trading, they weigh risks of future deals. They also take account of potential rewards. For instance, if a swing trader thinks that a stock’s price may double soon, they may take a risk and purchase that stock. However, if they think the price rise is not substantial enough to take a risk, a swing trader will pass on it.
- 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 also.
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.
- Pros
It requires less time to trade than day trading.
It maximizes short-term profit potential by capturing the bulk of market swings.
Traders can rely exclusively on technical analysis, simplifying the trading process.
- Cons
Trade positions are subject to overnight and weekend market risk.
Abrupt market reversals can result in substantial losses.
Swing traders often miss longer-term trends in favor of short-term market moves.
- What Are Some Indicators or Tools Used by Swing Traders?
Swing traders will use tools like moving averages overlaid on daily or weekly candlestick charts, momentum indicators, price range tools, and measures of market sentiment. Swing traders are also on the lookout for technical patterns like the head-and-shoulders and cup-and-handle.
- Which Types of Securities Are Best-Suited for Swing Trading?
While a swing trader can enjoy success in any number of securities, the best candidates tend to be large-cap stocks, which are among the most actively traded stocks on the major exchanges. In an active market, these stocks will often swing between broadly defined high and low points, and the swing trader will ride the wave in one direction for a couple of days or weeks and then switch to the opposite side of the trade when the stock reverses direction. Swing trades are also viable in actively traded commodities and forex markets.
- Day Trading vs. Swing Trading
The distinction between swing trading and day trading is, usually, the holding time for positions. Swing trading, often, involves at least an overnight hold, whereas day traders close out positions before the market closes. To generalize, day trading positions are limited to a single day while swing trading involves holding for several days to weeks.
By holding overnight, the swing trader incurs the unpredictability of overnight risk such as gaps up or down against the position. By taking on the overnight risk, swing trades are usually done with a smaller position size compared to day trading (assuming the two traders have similarly sized accounts). Day traders typically utilize larger position sizes and may use a day trading margin of 25%.
Swing traders also have access to a margin or leverage of 50%. This means that if the trader is approved for margin trading, they only need to put up $25,000 in capital for a trade with a current value of $50,000, for example.
- Swing Trading Tactics
A swing trader tends to look for multi-day chart patterns. Some of the more common patterns involve moving average crossovers, cup-and-handle patterns, head and shoulders patterns, flags, and triangles. Key reversal candlesticks may be used in addition to other indicators to devise a solid trading plan.
Ultimately, each swing trader devises a plan and strategy that gives them an edge over many trades. This involves looking for trade setups that tend to lead to predictable movements in the asset's price. This isn't easy, and no strategy or setup works every time. With a favorable risk/reward, winning every time isn't required. The more favorable the risk/reward of a trading strategy, the fewer times it needs to win in order to produce an overall profit over many trades.