If stock trading interests you and you have started exploring it, you may also want to familiarise yourself with the concept of Swing trading. Being a popular trading style, swing trading involves traders relying on technical analysis for their trade decisions. The idea is to fetch decent returns by adopting an unconventional route.
Here, we will explore the concept of swing trading in detail and explain how it works, along with some of the benefits and risks involved.
Swing trading aims to generate profits from medium-term price movements or swings. Stock prices often move in waves or so-called swings and the trend could be upwards, downwards, or sideways. With swing trading, traders aim to trade as per up and down price swings within a daily time frame. These swings can last a few days or even a few weeks, sometimes going up to several weeks.
The idea of swing trading is to benefit from individual price swings rather than relying on long-term trends. Swing traders primarily form their trading decisions based on technical analysis, with very little to zero input from fundamental analysis. This strategy often involves chart analysis for predicting the end of one swing and the start of an opposite swing. Usually, trades enter at the beginning of a fresh swing and come out before the start of an opposite.
Different traders follow different swing trading techniques for their trades in order to maximize profits. Here are a few important steps that can result in successful swing trading:
A swing trader would first identify a stock or security, the price charts of which show a trend of upswings and downswings. This can be done with the help of a stock tracker. This can help in following the market to further identify stocks that are actively traded and follow a certain price movement pattern.
Swing traders usually rely on price charts of a relatively shorter period, ranging between a few weeks to a few months. The time period selected depends on when the security has a visible price movement pattern.
For analysing different price trends, traders mostly use technical analysis tools. The idea behind using technical analysis is to look for profitable opportunities to generate buy and sell indications.
As per individual risk appetite, traders may place the stop loss signal at a pre-defined level. This is meant for situations when the price of a stock begins to drop. After it drops beyond a certain point, the swing trader can close the trade and minimise losses. Thus, even if the trade turns into a loss, it can be capped or limited to an acceptable limit.
Recommended read – How does stock market work?
Swing trading and day trading may seem similar, however, there is a key difference between the two. This difference is ‘time’. The two strategies involve different time frames for holding a trade. Day traders make transactions within a few minutes or hours. Swing trading is done over a few days or weeks. Because of shorter time frames, day traders mostly do not hold positions overnight. Swing traders, however, take into account that a stock’s opening price could dramatically move away from its closing price the previous day.
Some of the key benefits that can be availed from swing trading are:
Additional read – How to calculate closing stock price?
Mentioned here are a few of the important factors that investors should know before investing through swing trading:
Swing trading can offer numerous opportunities to investors due to price movements resulting from short-term volatilities. With the help of technical analysis, investors can make the right investment decisions to make the most of price fluctuations. In the end, stock market success is about observing, learning, and implementing the right techniques to maximise gains.
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