Swing trading is one of the most popular trading methods, which is getting popular among beginner, intermediate, and advanced traders. So in this blog, you will learn about swing trading, its advantages and disadvantages, strategies for swing trading, and much more.
Table of Contents
What is swing trading?
Swing trading is a trading strategy that focuses on making a profit by changing price action in short timeframes. In other words, swing trading means making a profit from the relative change in a stock price. Swing traders will try to capture the upswings and downswings in stock prices.
Typically, positions in Swing Trading are held from one to six days, but some may last as long as a few weeks.
Advantages of Swing Trading
Here we try to discuss some of the advantages of swing trading:
The time commitment is not much
Swing trading will keep traders busier than long-term investing. But swing trading requires less time commitment than day trading. In day trading, you have to watch your price chart all day long to analyze data that is reprinted every 15 minutes or 30 minutes. But you don’t have to do this in swing trading.
You can trade part-time
The fact that swing trading does not take much time means you can do it with your 9 to 5 job or any other profession as a part-time work or hobby. And it can generate a constant cash flow for you.
Swing trading can be very profitable
With proper risk management and a good strategy, swing trading can be very profitable without any stress. If you implement your strategy well, you can make a reasonable return from swing trading.
On average, you can make 10-50% returns per annum from swing trading, which is a better return than any mutual fund or market return. But you have to keep learning and implementing your strategies.
It does not hold your capital for the long term
In swing trading, you don’t have to hold your capital for a long time like in long-term investing. If any trade is not working for you and giving you bad returns, then you can easily switch your investment to other trades by taking a small loss.
In other words, swing trading gives you greater flexibility to manage your funds. So that you make sure to make money on your investments.
Disadvantages of Swing Trading
Despite the many advantages of swing trading, there are also disadvantages to swing trading, which we will discuss now:
Exposure to overnight and weekend price gaps
Swing trades stay open overnight, and in some cases, over the weekend. So, they are exposed to the weekend or overnight price gaps, which can happen when there is market news or earnings reports during the after-market hours or over the weekend. This makes the stop loss useless. The only way to minimize the risk associated with this is to trade at a smaller trade size.
The possibility of missing exceptional stocks
Swing traders focus on making a profit from individual price swings. Swing traders try to enter at the beginning of a new swing and get out when a pullback starts. But in doing so, you may miss out on some great stocks that can give you a great profit on your investment if held as a long-term investment.
Timing the market is difficult
Even professional traders know that it is very difficult for anyone to time the market swings. If it is difficult for professional traders, how will it be for beginner traders?
Trading costs can easily add up
Swing trading can be done in multiple trading as compared to long-term investing. Hence the cost can easily add up to a huge amount. But in long-term investing, one trade can last for many months or years.
Strategies for Swing Trading
These are the top 8 most popular swing trading strategies used by the traders mentioned below:
Fibonacci Retracements
The Fibonacci retracements pattern is used by traders to identify support and resistance levels and therefore possible reversal levels on stock charts.
Stocks often tend to retrace a certain percentage within a pattern of the trend before reversing again, and plotting horizontal lines at the classic Fibonacci ratios of 23.6%, 38.2% and 61.8% on a stock price chart can reveal potential reversal levels.
Traders often look at the 50% level, even though it does not fit the Fibonacci pattern, because stocks tend to reverse after retracing half of the previous move.
The 61.8% retracements level acts as a resistance level and the 23.6% on the Fibonacci line acts as a support level. Swing traders try to enter a short-term sell position if the price in a downtrend retraces to and bounces off the resistance level and exit the sell position for a profit when the price drops down or bounces off the support level.
Support and Resistance Triggers
A support level indicates the price level or the area on the stock price chart below the current market price of the stock. A swing trader aims to buy a trade on the bounce off the support line, placing a stop loss below the support line. And when the price goes up, the trader makes a profit.
On the other hand, resistance is just the opposite of support. Resistance indicates the price level or the area on the stock price chart above the current market price of the stock. In resistance, a trader aims to enter a sell position on the bounce off the resistance level, placing a stop loss above the resistance line.
Channel Trading
In swing trading strategies, it requires traders to identify a stock that displays a strong tendency and is trading within a channel. If you have plotted a channel around a bearish trend on a stock price chart, you now consider opening a sell position when the price bounces down off the top line of the channel.
In swing trading, it’s important to trade with the trend. We used the example of a bearish trend, but you don’t do the same in the case of a bullish trend.
10- and 20-day SMA
SMA stands for Simple Moving Averages. SMAs plot out price data by calculating a constantly updating average price, which can be taken over a range of specific time lengths, or periods.
For example, a 10-day SMA means adding up the daily closing prices of stocks for the last 10 days and dividing them by 10 to calculate a new average each day. This length can be applied to any chart interval, from one minute to weekly. Short lengths SMAs react more quickly to price changes than those with longer timeframes.
With 10- and 20-day SMA swing trading, you can apply two SMAs of these lengths to your stock price chart. When the shorter SMA (10 days) crosses above the longer SMA (20 days), a buy signal is generated, and this indicates that an upswing is in progress. When the shorter SMA (10 days) crosses below the longer-term SMA (20 days), a sell signal is generated, and this type of SMA crossover indicates a downward swing.
MACD Crossover
The MACD crossover swing trade provides a simple way to identify opportunities to swing-trade stocks. This is one of the most popular swing trading indicators used to determine trend direction and reversals.
The MACD consists of two moving averages known as the MACD line and the signal line. And after the crossing of these lines buy and sell signals are generated.
If the MACD line crosses above the signal line, it indicates a bullish trend and you would consider entering a buy trade.
If the MACD line crosses below the signal line, it indicates a bearish trend, suggesting a sell trade.
A swing trader would then wait for these two lines to cross again, creating a signal for a trade in the opposite direction, before exiting the trade.
Trend-Catching Strategy
Swing traders exit a position whenever a target profit is reached, while trend traders tend to hold their position until the trend changes. Though it’s contradictory, swing traders can adopt the trend trading concept to identify a trend’s direction for profit gains in short-term trades.
For example, traders can check the previous trends of the stock price chart and identify them because there are chances for the same trend to repeat and this can be a great strategy for any swing trader for a short-term trade.
Breakout Swing Strategy
Breakout swing trading means traders look out for price breakouts and ideally invest in the long positions at the beginning of an uptrend.
With this breakout swing strategy, a trader attempts to take a position early in a potential uptrend. Traders have to enter a trade when they see the desired level of volatility in a stock. This strategy is helpful for those who are experienced traders.
Breakdown Swing Strategy
The breakdown swing strategy is just the opposite of the previously mentioned breakout swing strategy. In this trading strategy, a trader is trading against the momentum.
A trader aims to open a short position when the stock price breaks below a defined support level on the early side of a downtrend.
Ultimately, when a position is set, the trader will take profits just before it swings low. Both breakdown and breakout have similar pros and cons because they both rely on the same concept.
Conclusion
You can apply all these strategies to your future trades to help you identify swing trading opportunities in the market. People are now making new careers in trading and earning a handsome income. And you can earn it too if you have the right learning attitude. Learn and implement all these strategies. It’s always advisable to start trading with a small amount (capital) and gradually increase as your knowledge grows.