What is Swing Trading?

The transformation of trading from physical to online provides a plethora of trading opportunities in the stock market in India. It is more convenient and flexible to participate in stock trading with electronic devices and the Internet. You can execute your trades quickly without any complexity at your fingertips. It is also easy to avail of momentum signals in the market, whether long-term or short-term. 

All you need to choose is the one that suits your trading expectations and requirements. Swing trading is a trading option that allows you to make profits from their price rise. Your profit depends on the stock you choose to trade in, as different stocks provide different returns. Now, you may be wondering, what is Swing Trading in the stock market exactly? What is Swing Trading in India?

What is Swing Trading: Definition

Swing trading means a trading strategy by which investors buy a security and hold it quickly. You can hold your position for a few days and up to several weeks to make a profit. The objective of Swing Trading is to capture a portion of any price movement in the market. Another name for a part-time trader is a swing trader. 

How Does Swing Trading Work?

To work on your Swing Trading strategy, you must know how it works properly. As swing traders carry out pattern analysis to buy or sell a security to make profits from its price fluctuations, they focus on large-cap stocks because they are highly tradable in the market. There are high trading volumes in these stocks. You can gain in-depth details about how the market understands the company and its security price trends. You can get the necessary information through this active trading and technical analysis. 

There are many risks in Swing trading that you must consider for your Swing Trading strategy, where gap risk is the most common one, which means there is a significant rise or fall of stock in price. This risk occurs due to news or events during the market close, overnight, or at weekends. The opening price may be the reflection of any unexpected news. There may be a greater risk as long as the market remains closed. 

Example of Swing Trading

In the candlestick chart, you can observe the “cup and handle” consolidation pattern; the cup is u-shaped, while the handle points downward to some degree. It is a bullish signal. If you aim to profit, you must buy the stock at the cup’s top or above $3,555, the most recent high. There is a need to put a stop-loss order at the low in the cup handle ($3,395) that took place most recently. Hence, 

The risk – the trade’s maximum loss =  $160 ($3,555 – $3,395 = $160)

The reward/risk ratio of 3:1 is recommendable. You must sell at $480 (3 x $160 = $480) that is above the entry price, or $4,035 ($3,555 + $480).                

Swing Trading’s Advantages and Disadvantages

In Swing Trading, the assessment of trades mostly takes place on a risk/reward basis. After chart analysis for a stock, you can understand you can make a profit. 

Advantages

• There is less time required to trade as compared to day trading.
• Capture the bulk of market swings and increase the profit potential for the short term. 
• You can depend upon technical analysis and make the trading process simpler.

Disadvantages

• Both weekend and overnight market risk can affect positions in Swing Trading.
• Substantial losses can occur due to abrupt market reversals.
• You can lose out on longer-term trends for short-term market moves.

Day Trading vs. Swing Trading

Day Trading 

Timeframe: Day trading involves buying and selling financial instruments on the same day. Positions are typically closed before the market closes, reducing exposure to overnight risks.
Holding Period: Day traders rarely hold positions for more than a few minutes to hours, aiming to profit from short-term price movements.
Frequency of Trades: Day traders execute numerous daily trades, capitalizing on small price fluctuations to generate profits.
Strategies: They use technical analysis, charts, and market indicators to identify short-term patterns and trends.
Risk: Day trading can be highly risky due to the fast-paced nature of trades and requires constant market monitoring.
Margin Requirements: Day traders often leverage margin accounts to leverage their positions, increasing potential gains and amplifying losses.
Time Commitment: Day trading demands significant time and attention, as traders must closely monitor the market during trading hours.

Swing Trading

Timeframe: Swing trading involves holding positions for several days to weeks to profit from price swings or trends within a larger market move.
Holding Period: Unlike day traders, swing traders hold positions for more extended periods, avoiding the pressure of making quick decisions.
Frequency of Trades: Swing traders execute fewer trades compared to day traders, as they focus on capturing more significant price moves.
Strategies: Swing traders use a combination of technical and fundamental analysis to identify potential entry and exit points.
Risk: While swing trading is less intense than day trading, it still carries significant risks, especially when holding positions overnight.
Margin Requirements: Swing traders may also use margin accounts but might rely on leverage less than day traders.
Time Commitment: Swing trading requires less time and attention than day trading, making it more suitable for individuals with other professional commitments.

Choosing between day trading and swing trading depends on various factors, including individual risk tolerance, trading experience, time availability, and market conditions. Day trading may be more suitable for experienced traders who can handle the stress and fast-paced nature of the market. On the other hand, swing trading may be preferred by those seeking a more relaxed approach with potentially larger price moves. Both styles require discipline, risk management, and a well-defined trading plan to succeed.

Tips to Make Profits from Swing Trading

As we have already discussed what Swing Trading is, let’s understand now how you can benefit from Swing Trading. Here are some valuable tips to make a profitable swing trade. 

• You must invest in large-cap stocks because they are actively tradable on major exchanges. So, there are regular price swings. From here, you can draw your first strategy to benefit from Swing Trading.
• If you are looking for the maximum benefit from Swing Trading, you must invest in market sectors with no bull or bear in the long term.
• Another important strategy that you can implement to benefit from Swing Trading is using an exponential moving average (EMA). EMA is a technical chart indicator that allows you to track an investment’s price at a certain period. The EMA is a type of weighted moving average (WMA) where you can see more weighting or importance to the recent price data.

• For a right time investment, your attention must be on the direction of an asset.

• You must close a trade in a generally profitable position rather than looking for the maximum profit. This strategy is helpful to make profits from Swing Trading.

Parameters to Consider for Swing Trading

Here are five parameters that you must consider before taking part in Swing Trading. 

Breakouts

As you know well, Swing Trading is where you trade with the trend. At the same time, the breakout from a range, significant resistance & support zones, chart pattern, or reversal candlestick patterns come under technical tools worth paying attention to. 

Entering the trader after the breakout is a good idea. So, you must spot the breakouts in the stocks to enter a position. 

Volume

This essential tool makes you analyze the strength of a new trend. It is a must because a trend with a high volume is more robust than a weak volume. 

You can avail of this tool as a part of a breakout strategy. Breakouts follow a time of consolidation along with low volume. The volume will not spike until the breakout happens. Volume indicators are helpful to determine the volume in the stock.

Liquidity

You should exclusively trade in liquid stocks, which come under Swing Trading’s basic rules. Your selected daily minimum comes under arbitrarily, but 500,000 shares per day is an excellent example. One can have a fast exit from high liquidity stocks to incur less risk from the bid-ask spread. In general terms, more liquid stocks mean lower bid-ask spreads. 

Relative Strength

Selecting more substantial stocks than the sector or the index will be a good idea in Swing Trading. This indicator helps you determine both the strongest and the weakest stocks in the market. Stocks showing strong or weak RS over time may go forward.

Volatility

In Swing Trading, volatility comes under significant factors in terms of selecting stocks. You can understand the stock price movement with this tool. Volatility indicators such as Bollinger Bands and the Average True Range (ATR) are helpful to discern the volatility of a stock. Choosing volatile stocks is a good idea, as you can gain from their price fluctuations in the market. Volatile stocks take significant moves, where you can get a fair window for stops and profits.

Conclusion

Swing trading has become one of India’s popular trading options in the stock market due to its simplicity and ease. Both beginners and experienced traders can avail of the stock price movements through Swing trading. You can learn about the fundamental analysis and judgment tools necessary to make the potential returns in your trade.