Last Updated on Feb 10, 2022 by Ayushi Mishra
The stock market provides a wealth of opportunities for investors. Some enter the market for long-term investment and wealth-building goals, while others are interested in short-term profits. There are several trading strategies to explore; however, swing trading strategies remain the most accessible and popular form of active trading that provides immediate opportunities.
Table of Contents
This article contains:
- What is Swing Trading?
- How does swing trading work?
- Swing Trading vs Day Trading
- Merits and demerits of Swing Trading
- Swing Trading Strategies
What is Swing Trading?
Swing Trading is a trading strategy where one can buy stocks or other assets and hold them (known as holding a position) for a short period – usually between a couple of days to weeks – to earn a profit.
The purpose of swing trading is to achieve profits with any potential price movement or pattern, also known as ‘swing’ in the market. A swing trader wants to capture a chunk of the potential price movement and then moves on to the next opportunity. Some traders prefer volatile stocks with lots of movement, while others prefer sedate stocks.
Traders use the speculative strategy of swing trading to identify where an asset’s price is likely to move next to capitalize it. Traders use technical analysis to determine stocks that possess momentum and the best time to buy (entry) or sell (exit) them.
How does swing trading work?
Swing traders capitalize on the upward and downward “swings” of price movements and momentum trends of stocks. Most swing traders aim for small moves within large-cap stocks as they remain heavily traded. They may earn about 5% or more gains in a week. While other traders may wait a few months to earn a substantial profit.
Swing traders rely on daily charts like 60 minutes, 24 hours, 48 hours, etc. There are also frame charts for shorter time periods, such as 4-hour or hourly charts.
It is common knowledge that trading of any form comes with plenty of risks. Swing traders are exposed to various risks, the most common being gap risk. Gap risk can be loosely defined as the difference in opening prices due to overnight/weekend gaps and international market movements. Usually, the longer the market is closed, the greater is the risk of change in expected opening price. Furthermore, fluctuating changes in the market direction prone a trader to additional risk.
Typically, swing traders miss out on long-term trends as they tend to focus on shorter holding periods.
Swing trading vs Day trading
Swing trading and day trading appear similar, but there are specific technical differences. Let us jump right into it:
|Swing Trading||Day Trading|
|Swing traders have short-to-medium term positions. They hold stocks overnight and also over several weeks.||Day traders close out their positions at the end of each trading day, as day trading positions are limited to a single market day.|
|A swing trader makes multiple trades per week.||A day trader makes several trades per day.|
|As swing trading can be managed periodically, the trader can manage and trade on the side while also maintaining a full-time job.||As day trading requires constant attention, it is a full-time job, wherein a trader monitors market movements throughout the day frequently.|
|Swing trading involves fewer transactions.||Day trading has many intra-day transactions.|
|The trading outlet for swing trading is the brokerage account.||The trading outlet for day trading is specialized trading software.|
|By holding overnight positions, swing traders are exposed to gap risks and down against position, resulting from unpredictability and news announcements.||Day traders do not hold positions overnight; they are not exposed to gap risk.|
|Involving the market risk, swing traders smaller position size. They also have access to a margin or leverage of 50%.||Day traders typically use large position sizes and a day trading margin of 25%.|
|Gains and losses accumulate slowly in swing trading.||Gains and losses accumulate quickly in day trading.|
Merits and demerits of swing trading
- Owing to the short-term nature of trading, swing trading requires less time to trade than day trading. It also does not demand the same level of active attention as day trading. As a result, a swing trader has the opportunity to start slowly and build the number of trades over time.
- It maximizes short-term profit potential by capturing the bulk of market swings.
- The trading process can be simplified with the help of technical indicators. Traders can find out past trading activity and price movements that indicate future price movements. Swing traders can rely exclusively on a wide variety of technical indicators and charts that provide insight into market psychology, and multi-day patterns to determine the potential direction of a stock price.
- Swing traders are subject to overnight and weekend market gap risk.
- An abrupt market reversal may result in substantial losses. Swing traders tend to miss long-term opportunities in the market as they focus on short-term price moves.
- As a swing trader, one needs to take a deep dive into technical analysis, which may not always be easy. There may be a requirement for an aptitude for charts and numbers.
Swing Trading strategies
Swing traders deploy various strategies to determine actionable trading opportunities. Every swing trader is entitled to plan and strategize in choosing trading opportunities. The more favourable the risk or reward of a trading strategy, the more the overall profit is.
Let us take a look at the many strategies:
Most traders prefer the Japanese candlestick charts as they are easier to understand and interpret. Each candle captures open, close, high and low prices for the security over particular time horizons chosen by the investor. One can identify trading opportunities through specific candlestick patterns.
The Fibonacci retracement indicator can be used to identify support and resistance levels. With this indicator, one can find market reversal opportunities. The Fibonacci retracement levels of 61.8%, 38.2%, and 23.6% usually reveal possible reversal levels.
The T-line on a chart helps one to decide on the best time for entry or exit. When security closes above the T-line, it indicates that the price will continue to rise. When the security closes below the T-line, it determines that the price will continue to fall.
In addition to that, one can also use moving averages that look for bullish or bearish crossover points. Simple moving average (SMA) and exponential moving average (EMA) are some such strategies.
Furthermore, traders also use cup-and-handle patterns, head and shoulders patterns, flags, and triangles.
For novices, swing trading may be risky as it entails a certain level of understanding of the ways of the market and use of technical analysis to be able to actually capitalize on the market movements. On the other hand, it may be considered an easy way to get into the market, as one can typically start with an amount as minimal as Rs. 5,000 – Rs. 10,000, although even less is acceptable too. However, as the cardinal rule dictates, the capital should be money one can afford to lose. You should know that even with the strictest risk management, it is important to be prepared for the unexpected.
If you are looking for a shubh muhurat to trade/invest, keep an eye on the upcoming Muhurat Trading session. It is an hour-long trading session, investing/trading during which is considered to be auspicious by the Indian investors community. Start planning your strategy and add stocks in your watching as now is the #DimaagLaganeKaMuhurat. You can use Tickertape’s Screener to screen the stocks.