Swing Trading: Meaning, Advantages and Techniques

Trading in stock exchanges can be a complex phenomenon due to its inherent volatility.. There are different forms of trading that you can undertake as per your risk appetite and investment vision. 

Swing trading is one of the most popular forms of trading, which entails holding a position for more than one day or 24 hours. In simpler words, it is the opposite of intraday trading which involves squaring off your positions within the same day. This article will consider different working aspects of this trading form.

What Is Swing Trading? 

In this type of trading, you buy a financial asset to benefit from its short-term price fluctuations. after purchasing and holding the security for several weeks or months, you sell it to book profits. 

Theoretically, holding a position for a few months would also come under swing trading. But practical usage only involves holding a trade position for a maximum of one month. You can use several technical analysis tools to recognise stocks with a likelihood of trading higher and thereby effectively deploy a swing trading strategy. 

You can take the help of various tools such as candlestick patterns, chart patterns, indicators, etc., to decide. The main fundamental theory behind this is to look out for stocks whose price is at the resistance or support on the respective highs or lows. Meaning, the price never moves in the single direction. It makes a series of highs and lows. Let’s say you are looking to go long on a stock, then the stock must be in an uptrend, which means the stock makes higher highs and higher lows. Every higher high would be known as swing high and every lower high is known as swing low. So, as you wish to go long in this case, you need to analyse a stock for opportunity when they are at swing lows.

How Swing Trading Works?

This concept lies in between two extreme forms of trading. First, it mainly focuses on taking advantage of short-term fluctuations in price due to changes in the company’s fundamentals like quarterly performance, grant of patents, etc. 

The main idea behind this form of trading is to look for the right stocks whose prices can increase soon. However, you must be cautious while carrying out this trading. You should decide your stop loss  and exit immediately if it breaches. 

It is crucial to select the right stocks, as one wrong decision can wipe out all the hard-earned gains. In rare cases, positions in these trades can cross the one-month barrier. Different traders adopt different trading strategies and select stocks accordingly. Some may prefer more volatile stocks, whereas others prefer conservative or sedate stocks. 

Now that you know the functioning of swing trade let’s shift our discussion to its other aspects.  

What Are the Advantages of Swing Trading?

Some advantages of swing trading are as follows: 

Less time-consuming

Swing traders enter the arena with a prefixed timeline. They execute their trade quickly and look to book profits in a short period. Therefore, it is one of the best ways to earn quick money (when done right). 

Indicators 

This trading mechanism involves the use of several technical tools and indicators. As you will be taking a decision only after considering the results of these indicators, there is a level of certainty in this financial trade which may cover the high risk. 

Flexibility 

Another benefit of this trading mechanism is time flexibility. You are not required to settle your positions within a specified period as a trader. If you are facing a loss, selling them is unnecessary, and you can continue holding them until you get desired results.  

What Are the Different Swing Trading Tactics?

The different strategies related to this trading mechanism are as follows: 

Fibonacci Retracement

It is a technical tool that uses Fibonacci numbers for carrying out research to identify different prospective stocks. Furthermore, you can also get an idea about the various resistance levels and stop-loss targets while using it.

Relative Strength Index 

RSI, or relative strength index, functions as an momentum indicator. Therefore, you can use it to carry out market analysis, identify the direction of momentum, gauge the market condition, etc., and thereby try to understand future price movements of a security. 

10 and 20-day Simple Moving Average

Another technical indicator you can use for carrying out swing trade is a simple moving average of 10 and 20 days. This tool considers the average price of assets for a respective period.

How to Carry Out Swing Trading?

Here are three steps of undertaking a swing trade: 

• The first involves identifying a stock that can give better returns.
• Next, you should use various technical indicators to assess the stock’s performance and get confirmatory signals on the stock. 
• The final step entails selecting the entry point and, at the same time, determining stop loss and target. 

Final Words 

Swing trading is one of the most popular trading techniques to earn profits in less time. Unlike  in investing, when you are in a swing position, you will hold your position for a short-term maximum of one month. If you are planning to participate in this, you must use various technical tools to make correct decisions. 

Frequently Asked Questions (FAQs)