- What is swing trading?
- Understanding swing trading
- What is the “swing” in swing trading?
- Advantages and disadvantages
- Swing trading tactics
- Example of swing trading
- How does swing trading differ from day trading?
- What are some indicators or tools used by swing traders?
- Which types of assets are best suited for swing trading?
In this article, we will provide an overview of swing trading, one of the popular short-term trading strategies. We will explain its basics, including how traders use it and its pros and cons.
What is swing trading?
Swing trading is an active trading style in which the trader holds traded stocks, currencies, commodities, and other financial instruments for a relatively short period. A swing trader will often stay in sync with economic indicators released throughout the trading day and look for price movements that signal changes in market conditions.
It typically involves analyzing the price and volume action of an asset to identify a trend, then taking a position in the direction of the movement to close the position when the trend reverses. Swing traders use various technical analysis tools to identify potential entry and exit points.
Understanding swing trading
Swing trading aims to capture a chunk of a potential asset price movement. Some traders choose fluctuating markets, attempting high returns with high risks in a relatively short period. Others favor more steady stocks where high profits/losses are less probable; they gain more control over their stocks with lesser risks.
Swing trading, in any scenario, is the method of predicting the direction of an asset’s next price movement, taking a position, and then profiting if the prediction comes true.
Swing trading can range from a single market session to multiple weeks or months, and a trader can maintain long or short positions. This is just a basic time range; even though some deals may extend for several months, the trader may still classify them as swing trades.
Swing traders aim at cultivating profits from an upwards breakout move as much as they can before the reversal of the movement is visible, after which they would revert the direction of their trade. This style is highly effective for traders who combine technical analysis with the fundamentals of a particular commodity to predict the upcoming swing trade stocks.
What is the “swing” in swing trading?
Swing trading is one of the most used trading strategies among traders looking to capitalize on short-term price swings in a particular asset. The “swing” in swing trading refers to the up-down movements in the price of an asset over a period. These fluctuations can be in either direction, and traders use their knowledge and patterns to predict the future of the upcoming swing. These swings generally distinguish where a trader must buy a particular stock and where they must exit their position.
Advantages and disadvantages
Swing trading can provide higher returns than buy-and-hold strategies, as the trader can capitalize on short-term market swings. It requires less capital, meaning a trader can start with a smaller amount of money. It is a minimal time commitment, so it does not require full-time availability; hence it can be done part-time, meaning that it can be a great way to get additional income and still have time for other activities.
Swing trading is also an excellent way to have a diverse portfolio and greater stock control. The trading process is simplified as traders can rely highly on technical analysis.
The disadvantages of swing trading are that it can be risky, as short-term market movements can be unpredictable, and sudden reversals can lead to significant losses. Traders also need to monitor the markets, as swings can happen quickly.
Additionally, a swing trader might miss out on exceptional stocks and long-term movements. Timing the market swings is a challenge even for experienced swing traders, as it is difficult to predict a swing very precisely.
Swing trading tactics
The swing trading strategy involves alternating between long and short positions. Swing traders buy and sell stocks using stop-loss orders at specific prices. Swing trading aims to take advantage of small price changes without taking too much risk or losing a lot of money if the market moves against them.
It is a trend-following approach to investing based on risk analysis, where the higher the risk, the more excellent the opportunity for profit over investment. The trader must be open and ready to take advantage of any fluctuation in the stock’s price movement to maximize their profit.
Swing traders often use technical analysis tools, such as chart patterns and moving averages, to identify possible entry and exit points. By closely monitoring the price movements of their chosen assets, swing traders can look to capitalize on the short-term swings in the market.
Example of swing trading
Let’s look at an example of the basics of swing trading using Amazon stock:
- Analyze the market
Read up on the news about Amazon and look at financials. Analyze the company’s performance and outlook to make an informed decision. Conduct research and analysis to identify potential opportunities.
- Choose your entry point
Look at technical indicators, news, and other data to identify potential trends. Subsequently, set an entry point of, for instance, $120 per share.
- Set the stop-loss order
You can place a stop-loss order of $115 per share. It will protect you from significant losses if the stock price drops significantly. The estimated risk for this trade is $5 per share, i.e., $120- $115.
- Set the take-profit order
You can calculate the potential reward based on the risk incurred. In this case, a profit of at least two times the loss would equal the price above $130. Set a take-profit order of $130 per share. It will lock in profits if the stock price rises.
- Monitor the stock
Monitor its performance to ensure it meets your expectations. Accordingly, adjust the stop-loss and take-profit orders as needed.
- Exit the trade
When Amazon’s stock reaches the take-profit order of $130 per share or above, sell the stock and exit the trade.
How does swing trading differ from day trading?
Swing and day trading are two popular trading styles in the financial markets. Both involve taking advantage of short-term price movements, but there are some key differences between the two.
Swing trading rules typically involve holding positions for a few days or weeks and looking for more significant price movements. On the other hand, day trading involves taking advantage of smaller price movements within a single trading session, usually by making multiple trades throughout the day. Swing trading can be done periodically, and the accumulation of profits/losses is slow, while day trading requires constant attention and faster profit/loss accumulation.
Since day trading involves multiple trades within a single day, the transaction and commission costs can easily add up and become significant. However, in swing trading, transaction fee builds up slowly, as trades can extend to multiple weeks or even months.
Day traders also follow a strategy called ‘scalping’ where profiting is done from small price changes, which is very fast; this strategy prioritizes many small profit-making trades, eventually adding up to more significant gains. On the other hand, swing traders can take advantage of leverage.
Leverage allows traders to increase their buying power by borrowing funds from a broker/exchange, allowing them to open larger positions than would otherwise be possible with their available capital. By using leverage to increase the size of their positions, traders can generate more significant profits on a smaller capital base.
Swing and day trading strategies require a good understanding of market fundamentals and technical analysis to be successful. Ultimately, the trader chooses the best trading style for himself, depending on risk tolerance.
What are some indicators or tools used by swing traders?
Swing traders use a variety of indicators and tools to identify entry and exit points for their trades. Some of the most common indicators and tools used by swing traders include technical indicators such as Moving Averages, Support and Resistance levels, Bollinger bands, and oscillators. They may also use trend lines, chart patterns, and other charting techniques to identify potential areas of support and resistance.
Additionally, many swing traders use fundamental analysis to identify the market’s overall trend and the security’s underlying strength. Finally, swing traders use risk management techniques, such as stop-loss orders, to limit their downside risk.
Which types of assets are best suited for swing trading?
Although many types of securities can be profitable to swing traders, it is best to trade in highly active stocks. Swing traders, as a rule, choose the most active stocks as they have more interested investors and significant capital for movement.
Being among the highest trading-volume equities, they can swing from a considerably higher price value to a lower mark. The traders thus get more chances to swing from low to high and vice versa, making their trading moves and maximizing their profits.
Swing trading attempts to capture short-term gains in stocks, currencies, commodities, and other financial instruments. Swing trades can extend from days to months after establishing the associated risk and reward ratio, where the goal is to maximize profit from a potential asset price movement.
Often traders choose this style of trading for its short-term gains and because it can be done part-time. Still, they also must be aware of a stock’s volatility, react quickly to sudden changes in market trends, and exercise proper risk management.