What Is Swing Trading?

Swing trading is a trading method where traders buy a stock and hold it for a short period usually between a few days to one or two weeks with an aim to make profits. Swing trades aim to capitalize on buying and selling at the interim lows and highs within an overall larger trend. Swing trading stands somewhere between day trading and long-term trading. It is based on the concept of making a series of little gains that can add up to a large profit. However, it is subject to market risks and every trade might not turn favorable. Swing Trading consists of the ups and downs created by the price movement. It’s an up and down movement that is large enough to create a new price level. Such a kind of trading with the help of technical analysis captures short-term opportunities in the market.

The price changes or the swings are based on:

  1. Major changes in a company’s prospects.
  2. Change in the outlook of an investor. It may revolve around an industry, sector, or even the overall market.

How do Swing Trades work?

Swing traders analyze chart patterns, typically with 1 Day candles to buy a stock to capitalize on the expected upward swing in the price of the share. For example, if there is any Govt. policy coming up next month which is expected to positively impact the Banking sector, an investor might take a position based on the news expecting to book profits during the short-term upswing in bank shares.

Advantages and Disadvantages of Swing Trading

Advantages of Swing Trading

  1. Minimum time commitment – It is less time-intensive as compared to day trading
  2. One can trade part-time - Due to the nature of swing trading, you can combine it with any proper job or business as it doesn’t take much time.
  3. Swing trading doesn’t require much analysis when compared to day trading or long-term trading. It is a simplified form of trading.

Disadvantages of Swing Trading

  1. There’s sudden exposure to weekend price gaps and market risks.
  2. Cost of trading can easily add up to a huge amount when compared to long-term investment due to the nature of it.

Day Trading Vs. Swing Trading

Swing trading and day trading may appear identical. The main difference between the two is the duration of holding the position.

Swing traders enter and exit the position over several days or weeks whereas a day trader holds the position for some minutes or hours.

Day Trading Swing Trading
There are several transactions. There are fewer transactions
Active time required is more. Active time required is less.
Use of latest technology and software required. Doesn’t require the use of the latest applications. You can use your brokerage account.

Key Tools for Swing Trading

For Swing Traders, it is important to identify the trend of the charts and capitalize on it. The share price of any company can either be in an uptrend, downtrend, or sideways trend. Uptrend is when the chart makes higher highs and higher lows with time. The downtrend is when share price forms lower highs and lower lows with time. A sideways trend is when the share price is oscillating within a fixed range. For swing traders, only the uptrend phase is of interest.

Once there is a conviction of uptrend through technical analysis, traders can take a position. Swing traders often refer to certain indicators on chart to look for actionable trading opportunities:

  • Support:   Support level for a particular timeframe is the price point from where the falling price of a stock is expected to reverse. Generally, a support line for a time frame is drawn by connecting all the low points on the chart within that timeframe. A support level is usually where traders place Buy order.

  • Resistance:   Resistance level for a particular timeframe is the price point from where the rising price of a stock is expected to reverse. Generally, a support line for a time frame is drawn by connecting all the high points on the chart within that timeframe. A Resistance level is usually where traders place Sell order.

  • Simple Moving Average (SMA):  This is a technical indicator that is used to measure the average price of the share within a selected timeframe. This helps to determine whether the current market price is above the Average price over the selected time frame.

  • Moving Average Convergence Divergence (MACD):  The MACD indicator is quite popular among traders. They use it to identify the relationship between two moving averages of a share’s price. MACD is calculated by subtracting the 26-day period EMA from the 12-period EMA. It is used to identify buy and sell signals.

  • Relative Strength Index (RSI):  RSI is a momentum oscillatory indicator. It is used to identify whether the market is in an overbought or oversold situation. Usually, traders consider an RSI above 70 as an overbought situation and an RSI below 30 as an oversold situation.

  • Apart from technical indicators, traders can keep a keen eye on the business and economic news. Generally, stock-specific news or sector-specific news can give direction for stock selection. Post that one can check the chart of the company and apply various indicators to cross-check if it supports the expectation. Basis these, one can take a position.

    Conclusion:

    Swing trading can be an interesting trading opportunity and developing an understanding of how to find stocks to swing trade and the basic knowledge of indicators can help derive optimum benefit out of it.

Swing Trading FAQs

The Swings refer to the stock price fluctuations that take place within a certain time frame.

It is also the volatility that a stock experiences in the stock market.

It could be one provided you as an investor are looking to make short-term gains. If done consistently over a period of time, it can add up to incredible annual returns.

You can be successful in Swing Trading if you have a short-term financial goal. However, you should be well-versed in its fundamental and technical analysis.

Swing trading is considered to be less risky than day trading. The stress amount is less. Also, you are less likely to overtrade and the chances of making trading mistakes are lower as compared to day trading.

The fundamental difference between the two is that day traders make several trades in a day whereas the swing traders will analyze trends and then select stocks that would yield high returns in the future for profit-making.

Day trading entails buying and selling stocks over the internet over a short time, typically a day. It aims to capitalize on short-term price fluctuations.