Swing Trading is all about making smaller profits by trading in the direction of the ongoing trend. It is a trading method in which the traders hold positions for a few days to a few weeks.
In this type of trading method, traders trade along at the same price direction of an asset usually over a short period.
The swing traders make their trading decisions based on market trends by using technical analysis that help them in identifying chart or candlestick patterns, trends, and potential trend reversals in a short timeframe.
Let us discuss what is actually meant by Swing Trading by differentiating it with trend and day trading-
Swing trading is a trading method that is similar to trend trading in the sense that one trades in the ongoing direction and takes profits when the stock moves in that favourable direction.
Swing trading is also similar to day trading and the only difference between them is that in swing trading the position can be held for more than a day. Day traders buy and sell in a few minutes or hours and they do not hold the positions overnight. Thus, in this way, the risks of news announcements are avoided by them which might come after the stock market hours that could possibly generate a large market move against their desirable trade direction.
On the other hand, Swing trading is done over a few days or weeks and hence, the swing traders must be aware that a stock’ price on the next trading day may fluctuate a lot from its last trading session’s closing price.
Having understood what is swing trading and how it differentiates from day trading, let us discuss some of the technical tools with which we can use to identify swing trading opportunities-
1. Fibonacci retracement
Swing traders can use a Fibonacci retracement for identifying the support and resistance levels. With the help of these indicators, traders can identify the opportunities for market reversal. The Fibonacci retracement levels such as 23.6%, 61.8% and 38.2%, helps in identifying possible reversal levels. A swing trader can enter a long trade when the price is moving down and is on the support level at the 61.8% retracement level from its prior high.
2. Trend Indicators:
As swing trading is similar to trend trading, we can use trend indicators to find the trading opportunities for swing trading. Technical indicators like moving averages, volume, ease of movement, stochastic oscillator and relative strength index can be used for taking entry and decisions for swing trading.
3. Japanese candlesticks:
Many swing traders also use Japanese candlestick patterns along with the above-mentioned trend indicators for identifying swing trading opportunities. They can use bullish candlestick patterns like the morning star, bullish engulfing, bullish harami, piercing patterns etc. to enter a long trade. Similarly, traders can use bearish candlestick patterns like the evening star, bearish engulfing, bearish harami, dark cloud patterns etc. to enter a short trade or exit their long positions.
4. Chart Patterns:
Chart patterns like head and shoulders, flag, pennants, wedges can also be used for identifying swing trading opportunities.
We can also filter out stocks for swing trading using StockEdge.
Like every method of trading, swing trading too has its benefits and disadvantages, let us discuss them-
Let us first discuss what are the problems or limitations associated with swing trading-
- In swing trading, as our positions stay open overnight, there can be price gaps on the next day that can happen when there are results coming or other market news after the trading hours or over the weekend.
- Swing trading involves making a profit from individual stock price swings. For this, you have to enter at the beginning of the new trend and get out when the reversal starts. But while doing so, you may miss other trading opportunities that would have made more money.
- Timing the market swings is TOUGH even for experienced traders.
- Swing trading involves high trading costs, as compared to long-term investing in which one stock is held for many months or years.
Now let us come to the benefits of swing trading-
- Swing trading requires less time commitment as we don’t have to sit on the trading screen the whole time.
- We can combine swing trading with our 9-5 job or any business so that we can generate constant cash flow for us.
- With a good strategy and proper risk management, swing trading can be very profitable without any stress. If you consistently implement your strategy, you can expect to make reasonably good returns from swing trading.
- On average, we can generally make around 10-50% per year from swing trading, which is better than investing in other investment tools.
- With swing trading, we also don’t have to tie our capital in a bad stock for a long time, unlike in long-term trading. We can take a small loss and move our capital to another stock if that trade goes wrong.
We can conclude that swing trading gives us flexibility when it comes to managing our funds so that our idle funds are working hard to make money for us. Also, don’t forget to put a stop-loss on every swing trade as it can go against our desirable direction too!