Swing Trading

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Swing Trading is a popular method of active trading, wherein the financial instrument is held for short to intermediate-term, ranging from two days to two weeks. The positions are at least held overnight in swing trading.

The swing traders work on similar principles as day traders, as the purpose is to make profits from short-term price movements.

Swing Trading Basics

However, in intraday trading, the positions are all squared off before the end of a trading day, while in swing trading the positions are held at least overnight and may extend to few days to few weeks.

In order to be successful at swing trading, the traders use a mix of both technical and fundamental analysis. The technical analysis is used to predict the price movement and to find out the stocks that have the potential of large price movement in a short duration, and fundamental analysis is used to assess the intrinsic value of the stocks.

On the basis of both technical and fundamental analysis, the swing traders determine the stocks or securities that can give him maximum returns on a short-term or intermediate-term basis, with least risk, especially when the prices are either reversing back to the average or a rally is fading.

Swing trading is mostly used for stocks and options.

Swing Trading Strategies

In swing trading, the profits expected is generally 5-10%, which may seem less but the strategy is to make cumulative short profits over a short period of time to give big overall returns. Similarly, in order to take cumulative benefits, stop loss also has to be at 2-3%, compared to 7-8% in other forms of trading, to ensure that losses are also less.

This brings swing trading to a healthy 3:1 profit to loss ratio, which is a fair portfolio management rule for success.

Some of the strategies used for swing trading are as follows:

1. Support & Resistance Triggers

Support is the level below the current price where buying overcomes selling pressure. A swing trader enters into a buy trade on the bounce off the support line with a stop-loss just below the support line. Similarly, the resistance level is above the current price where selling overcomes buying pressure.

Here, the swing traders enter a sell trade on the bounce off the resistance level, with a stop-loss just above the resistance level.

2. Channel Trading

This is used when the trader wants to trade with the trend. A channel is plotted around the trend, bearish or bullish, and the position is taken where the prices bounce off the top line of the channel.

3. Simple Moving Averages

It is a popular swing trading strategy wherein the simple moving average is used to smoothen out the price data over a period of, say, 10 days or 20 days.

The averages are connected to form a smooth line, eliminating the surrounding noise. With a 10 and 20-day swing trading system, when the 10 day SMA crosses above the 20-day SMA, a buy signal is generated and vice versa.

4. Moving Averages Crossover

It is a popular strategy wherein there are two lines: the MACD line and the signal line, and a buy or sell signal is generated when these lines cross each other.


Swing Trading Techniques

In order to begin swing trading, the most crucial decision is to choose the correct stocks. The key is to choose stocks with the highest liquidity. For this reason, swing trading is also called momentum trading. The liquid stocks have a high volume and follow a trend.

It is imperative for the swing traders to follow a trend and trade only when the market is moving, instead of trading in flat markets. In order to identify trends in swing trading, various methods are used like moving average convergence divergence, average directional index or fast moving averages.

In terms of the tools, swing traders use similar tools and softwares as intraday traders. They use trading softwares and charts, however, the charts used are usually for longer time frames like 60-minute, daily and weekly charts.

Technically swing trading happens when the trending stocks pause in between trends and follow corrections and then start moving in the direction of the trend.

It is this plus moment that the swing traders intend to capture and capitalise on, as at the pause moment risk reward ratio is the best and use of capital is optimum.

The key here is to identify the pause moment, which is done through various tools. Some swing traders use the support and resistance levels of the previous swing highs and lows, while others use moving average to find out the point where the reversal is expected i.e. the price of security moves back to the previous top of the bottom.

Many other swing traders make use of stochastic oscillators to find out the overbought and oversold points as their points of entry into the market.

As a bottom line, swing trading is an effective method of trading when intermediate-term good profits are expected, with risks being limited to a few days to weeks.

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