Investopedia defines Swing Trading as ‘Swing Trading is a style of trading that attempts to capture short- to medium-term gains in a stock (or any financial instrument) over a period of a few days to several weeks. Swing traders primarily use technical analysis to look for trading opportunities
The goal is to capture a chunk of the price movement and exploit a part of the longer term. It can be done on both volatile and sedated stocks and is entirely the trader’s preference. The trader will usually move on to the next opportunity after capturing a single price movement.
A detailed guide to Swing Trading: Definition, strategies, and resources to learn Swing Trading
There are various ways to go about Swing Trading. Many traders use a risk/reward strategy wherein they begin by analyzing the chart of an asset. Once they have determined their entry point, they place a stop loss and then try and figure out the optimal point of exit.
The stock selection, as well as entry and exit points, are determined usually by technical analysis, although some traders often use fundamental analysis to enhance their strategies.
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.
A key strategy that many novice traders fail to understand is that winning isn’t required, or quite frankly possible every time. No same strategy can work for all trades. One needs to aim to find favorable risk/reward as much as possible so that one needs to win fewer times in order to make an overall profit on the trade.
What kind of stocks should a swing trader pick? Like we mentioned before the level of volatility of stocks chosen is completely at the discretion of the swing trader. The best stocks to go for are the large-cap stocks which are also usually the most actively traded stocks on the major exchanges. There is also a lot of opportunities for swing traders to exploit in actively trading commodities and forex markets.
So how does one get started? Firstly understand the premise of how Swing Trading works. One is not looking to make 20 or 25% the profit goal should be a modest 10% or even 5% sometimes. The average length of the trade is 5 to 10 days, the trader ends up making a number of small wins which cumulate to a fairly decent annual return. A common piece of advice here is to also cut your losses sooner. If one puts a stop loss at a 3 or 4% range, you will be in a good position as a single huge loss can wipe away a lot of the progress made with the smaller gains.
There are five key strategies that swing traders usually use:
The first is the Fibonacci retracements. This can be used to identify support and resistance levels, and therefore possible reversal levels on a stock chart. Next, a swing trader could use the support and resistance triggers and build a Swing Trading strategy around them. Next is the channel trading strategy. This involves identifying a stock that’s displaying a strong trend and is trading within a channel. Another strategy that can be used is the use of simple moving averages (for example, 10 or 20-day moving averages). Lastly, they can also use the MACD crossover Swing Trading system. It consists of two moving averages – the MACD line and signal line – and is one of the most popular Swing Trading indicators used to determine trend direction and reversals.
Sounds exciting right? We bet you want to learn more. There are many resources available that can guide you through the entire process – from picking a stock to determining both entry and exit positions. It is also beneficial to have a brief idea about various technical trading strategies like the ones mentioned above, so do look for courses that provide the necessary background knowledge.
Goes without saying that practice makes one perfect (though we strongly believe that there is no perfect in the stock market) so don’t forget to continuously apply the concepts you have learned along the way. Even if you do not wish to play with money in the market, practice paper trading in real-time to instill confidence.
While one can learn through platforms like YouTube, it is always more recommended to opt for a full-fledged course from a professional institute. Not only will they provide more structure and discipline to your learning, but the peer network, as well as experience, is something that one can leverage throughout their trading journey. FinLearn Academy has a great course on Swing Trading that covers all that one needs to know to become a pro in the market!