Complete Swing Trading Guide – How to Start and Learn to be a Swing Trader

Last Updated July 23rd 2021
20 Min Read

The stock market can be one vast and complex platform for investments and trading with a plethora of techniques and strategies on offer. In trading itself, the tools a trader can use and the avenues available to make good returns are many.

For anyone who is new to the world of stock trading or even has been around for some time, there is a question that often comes to mind. What type of trading is best suited to beginners and intermediate traders?

It is in this context we are putting together this guide introducing the ins and outs of swing trading

What is swing trading?

Swing Trading

Swing trading is a trading methodology that aims to benefit from the technical movements of a stock based on fundamentals over the short term. It is typically employed for a period between 2 days to 2 weeks or even up to a month. Swing trading has a more medium-term timeframe for the buy or sell position taken. 

A swing trader tracks the technical charts and monitors for any changes in the fundamentals that can create a swing in either direction. As against the intraday movement of the stock’s price that a day trader benefits from, swing traders wait it out over days to allow for a company’s fundamentals to make an impact. This can translate into much more significant returns as compared to what a day trader can, theoretically, make. 

Read Also: What are the Pros and Cons of Swing Trading?

Who is swing trading ideal for?

Swing trading is probably the most ideal trading style a beginner or anyone with lesser experience can get into. Who else is it a good solution for? 

Here are some pointers on that:

  • Swing trading definitely suits anyone with little or no experience and some capital to start off with. Swing trading is comparatively a longer game and more suited for anyone not experienced enough to make split decisions. A multi-day scenario allows for catching up on the situation and to weigh one’s options.
  • Swing trading also is better suited if you already have another profession and cannot devote the entire day. 
  • Also, swing trading can hit the sweet spot for those who are willing to grow in knowledge and experience. 

What to know before considering swing trading

Once you are convinced, your interests and circumstances point to swing trading as the best trading option; it is time to examine some considerations before entering the arena. 

It is possible to start swing trading with much lesser capital than you would require for day trading

The various heads under which your capital and operating expenses need to be allocated are:

  • The initial expenses towards setting up an infrastructure
  • The cost of buying the stocks itself 
  • The operational costs of trading

Expenses towards infrastructure

You will need a trading software to work with. There are plenty of free options out there and a good research will help you find the right one. As you progress and your requirements increase, you can consider paid ones, if need be. 

Also required are data to work with. For swing trading, there is a dependence on fundamentals and technical in the form of both live and historical data. Some of this may be available for free but serious trading would require you to opt for paid services. 

It is also important to invest in proper sources to help you research and take decisions. Signals can also be a useful way to discover opportunities. The free ones may be able to get you started but the paid ones can really raise your game. 

Capital required to start off

Begin by chalking out your trading goals to establish the initial infusion of capital to start off. It is better to get started with a small corpus and then expand it as you get more comfortable. It is also wiser to trade in safer stocks and in industries you have a grip on before spreading your wings. 

Operating expenses

There would be a commission that is charged by the broker each time you place an order. Even in the case of the order not getting executed at the price you intended, there are slippage charges to be borne. 

The challenge overall would be to maximise profits while keeping costs down. As your trading volumes increase, you get access to a better, lower commission slab that results in lower operating costs.

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Identifying the stocks to swing trade

Identifying Stocks

In your early trading days, it is important to be selective about what you trade in. It is best to rely on technical and fundamentals to pick your stocks. Research and trading tools like signals and technical charts should be consulted. 

Besides having a clear strategy on which sector and which stocks to take on, it is also imperative that there is agreement on what to avoid too. 

First, let us take stock of the key fundamentals that you need to bear in mind while choosing a stock to swing trade-in. 

Assess the trading volumes of a stock

When choosing a stock, look for ones where there is adequate trading happening with sufficient volumes too. Otherwise, you risk buying a stock at a price higher than what you want, resulting in slippage which requires you to spend more. 

It makes sense to buy into stocks that have a healthy volume of trading to ensure you can exit a position smoothly and at the levels you planned. 

Market sectors

Be aware of the fact that just like no two stocks are similar, the sectors too are different. Studying each sector and identifying the ones that suit your expertise or interest and your trading goals can be key in choosing stocks. 

Taking a sector-wise approach can help sharp focus your swing trading strategy and, therefore, merits stock selection also on those lines.

Understand volatility

Volatility in stocks is a market reality and unavoidable. But, depending on your strategy, you can choose to look at stocks you can benefit from in your swing trading. 

There are situations where volatility can help you reap a profit while, in others, it is best to avoid exposure. The best way to recognise both the risk and reward here is to use something proven like the ADX indicator. 

What to avoid: CFDs (Contract for Differences)

CFDs or Contract for Differences is a financial contract and a form of derivative trading that opens up the possibility to speculate on the price movements of an asset in the short term. The trade revolves around the difference in the price of a stock between the opening and closing of the market. 

The actual ownership or physical delivery does not happen and the broker who initiates the deal is the one in charge. A CFD is inherently a risky and non-standardised contract that does not fall in the regulatory ambit. It may also not be as easy to liquidate as a stock itself. 

Unlike stocks where there is a straightforward commission involved in a trade, brokers offer a CFD sans commission. It also means there is a transparency issue here as a broker, in lieu of a commission, resort to taking a spread in the deal. 

While there are plenty of CFD offers you will encounter in the market, it is best avoided by beginners. 

What to avoid: Penny stocks

Penny stocks refer to units of small companies that usually trade for under $5 a share. These, typically, are not traded frequently and easy and certain liquidity is often a problem. Information can be hard to come by on these companies, making an assessment of their share price difficult. They are also prone to volatility and uncertainty, especially as lesser volumes traded means lesser data available for predictions. Even at a company level, there are chances of limited information about the operations and business plans. 

Every type of trading has its advantages and disadvantages. Let’s take a look at the benefits and downsides of swing trading.

Advantages of swing trading

You can swing trade part-time

Unlike other types of trading like day trading and long-term trading, that demand a lot of time, swing trading is ideal for traders who are short on time, and can even be done part-time or as a hobby. A swing trader has a longer window that allows him to analyse a stock’s performance for days or months. So a swing trader doesn’t need to keep looking at the market movements all day. He just needs to spend some time scanning the stocks and place a buy stop order for the coming trading day.

Less hectic

Swing trading does not demand constant attention and action. This allows a swing trader to make trading decisions in a more relaxed manner without the time pressure of day trading.

Capitalise on major market moves

One of the major benefits of swing trading is that you can capitalise from just a day or two of market movements. Use stop losses so that you can place larger positions and minimise the amount you could possibly lose if a trade goes wrong.

More potential to make profits

You can take a step back to analyse the market and make calm decisions. There are fewer chances to make mistakes and greater possibilities to make profits.

Lesser number of trades performed

When compared to day traders who are continuously in the buy and sell mode to amass their returns over multiple trades, swing traders can be more selective.

There are clear boundaries and stopping points

Swing traders can rely on stop losses and quickly get out of unprofitable trades and move on to other lucrative stocks.

Wide range of professional trading platforms

Swing traders can avail themselves of a wide variety of swing trading platforms. We will talk about some of the popular trading platforms later in the article.

Check Out: 7 Tips on When to Buy a Stock and When to Sell a Stock

Disadvantages of swing trading

Although swing trading has its benefits, they come with a few disadvantages too.

It is risky

In swing trading, as positions are held for a longer time it can expose the trader to unexpected market moves. There is the risk of overnight and weekend price gaps.

Not all stocks are suitable for swing trading

There are certain blue-chip stocks of established companies that are not suitable for swing trading in certain market conditions. 

There is a lot to learn

You have to be familiar with technical analysis and should be able to make quick decisions to make sure that you’re able to enter and exit at the prescribed points. 

So, we know that a swing trader has to analyse and interpret data to make trading decisions. But, where can you find the necessary data and market charts that facilitate trading and how can you interpret it easily? This is where you need the help of a swing trading platform. 

What is a swing trading platform?

A swing trading platform is an application which has a set of computer programs and necessary tools that can be used to improve your decisions while trading, execute all the trading tasks through fundamental and technical analysis features. A trading platform is the connecting media between a trader and the marketplace.

A trading platform can be a desktop application, a web terminal, or a mobile app and can be either exclusive to a particular broker or work across different online brokers. Most trading platforms come with other features and tools, such as real-time quotes, charting tools, news feeds, and informational research. Some brokers offer their trading platforms for free or at a discount when you trade with a certain amount or do a certain number of trades per week/month.

Choose a swing trading platform

Let us take a look at some of the popular trading platforms for swing trading.

eToro

One of the leading swing trading platforms, eToro is well equipped with advanced features and can pick stocks and backtest them on one market at the same time. This swing trading platform is free if you have an account with eToro.

TradingView

A popular trading platform, TradingView offers a range of necessary tools offering detailed market analysis. That’s not all, it has over 100 technical indicators and more than 5,000 custom-built indicators, with which you can develop your own strategies and even share them with other traders on the chat forums.

The built-in stock screener not only offers fundamental data on companies but also analyses and compares domestic and global economic data. 

MetaStock

This trading platform has more than 300 technical indicators, integrated news, and built-in graphical tools for technical analysis. It is easy to filter and find the exact stock you are looking for.

Firstrade

This customisable trading platform lets you trade from any device. It has $0 trading costs, $0 minimum account opening requirement and no per-contract fees for options trades. 

A few other swing trading platforms are given below:

  • Thinkorswim
  • NinjaTrader
  • Merrill Edge
  • MetaStock
  • Multicharts
  • Fidelity
  • Robinhood

Once you’ve chosen your swing trading platform, you need to plan your strategies and trade setups that give you an edge and lead to predictable movements.

Swing trading strategies

Take a look at a few of the most common swing trading strategies below.

Mean Reversion

This strategy is based on trading against the current market direction. One of the purposes of a swing trader is to capture price swings of individual security prices. The mean reversion strategy assists you to identify when a security’s price is oversold or over bought. If it’s oversold, you can buy the security and if overbought you can sell it. 

Trend Following

Unlike the mean reversion strategy, with this strategy you are trading in the same direction that the market is moving, using information from momentum indicators to modify the position.

Breakout

Breakout trading is entering trades when momentum is in your favour. When a stock price moves above a resistance level or below a support level, both on increasing volumes, a breakout trader enters a long position.

Pairs Trading

As the name suggests, pairs trading is a strategy where you enter positions in two correlated stocks in the same market sector whose equity securities are trading at a price relationship. The strategy is to short sell the security that is overvalued and go long on the share that is trading below value. The trader is able to generate earnings, regardless of whether the market goes up, down, or sideways.

Sector Trading

Here, you identify the strongest market sector and only trade stocks that are the most promising ones.

Once you have decided your swing trading platform, you need to ensure that the strategies work. Let us take a look at the various steps for creating a strategy.

Steps for creating a Swing trading strategy

Step 1: Choosing the market for your strategy (or not)

There are traders who prefer to choose a market before building a strategy. If that is the case you may have to consider what works well in that particular market. For instance, just because mean reversion works well for stocks, does not mean that momentum strategies could hit the jackpot.

Instead of narrowing down on one specific market, you could also test your strategies on several markets and then see where you are getting better results long term.

Step 2: Coming up with the trading idea

Trading ideas are potentially profitable opportunities that you need to formulate for yourself. You never know what will work for you and what will not, so, you need to keep an eye on the market conditions and go through trading forums for inspiration.

Step 3: Backtest the idea

Now, you need to apply your trading strategies to historical data. This lets you improve your strategies over time by showing you which of your ideas are profitable, that you need to further test and improve or which of them should be dropped.

Step 4: Further improve on the strategy 

To further improve your trading strategies, try different approaches. Start by changing a parameter, then collect the information and data from a sample size of trades, and finally check whether the change made a profitable change in the performance. Repeat the process by changing the selection criteria. 

Step 5: Validate the swing trading strategy

The final step is to ensure its viability before the trader risks any actual capital. This is because we need to deal with curve fitting which happens when the strategy parameters are set to a random market to produce optimised results.

A curve-fitted strategy will not work in live trading and should be eliminated during the testing period. 

How to lessen curve fitting?

There are a few backtesting strategies that can be used to lessen a curve fitting issue. One strategy is out of sample testing.

In out of sample testing, the available historical test data is divided into two sets. One set of data is used for validation and optimisation and is called the in-sample period. The optimised test results are then applied to the other test data, i.e., the untested data set which is known as out of sample period. The curve fitting strategy when subjected to new data should lessen.

How best to implement your swing trading strategy 

The difficult part is now behind you – we have discussed the strategies for swing trading that we can employ and how to pick the right stocks. It is time we got to the execution stage. 

Diversify your portfolio 

It is always good to spread your risks across multiple stocks even in investments. But in trading, especially swing trading, this tenet holds even truer. 

To ensure there are good chances of getting handsome returns and even hedging your risk, buy into more stocks than limiting yourself to a handful. Of course, it is important that you buy into the right stocks and stick to your planned corpus. Similarly, avoid trading for the sake of trading and take positions only where warranted.

Another good way of spreading risk is to adopt multiple strategies to handle different market conditions. Straddling diverse strategies can be a good way to balance risk. A good example is to go with both trend following and mean reversion to get the best of both scenarios. 

Keep a hawk’s eye on risks

Even as you try and increase your profits, it is equally important to mitigate risk. A common strategy is to employ stop loss to stem a larger downside when a stock price slips from your purchase price. 

Market crashes need not mean your chosen stock is not worthy. So, keep a stop loss but far enough from your buy level to allow you to benefit from any market correction. 

A stop-loss scenario is a difficult one but an essential strategy for any trader. Take note of your risk appetite but keep the chances of them occurring low. 

Document and learn

Each trade can be a learning experience in itself. Consider them as crucial to your growth as a swing trader as a technical chart or research on fundamentals. 

As long as you study both your successes and failures, you will always emerge as a more knowledgeable and astute trader. The first step to this is maintaining copious notes in a journal. 

Revisiting your experiences can hone your understanding and sharpen your trading skills.

The psychology of Swing trading

Psychology of Swing Trading

There is so much talk about the technicals of trading that the emotional side is often overlooked. It can be tough to continuously aim to get successful trades yet having to balance the stress of avoiding losses. 

So here are a few tips on how to stay psychologically healthy in your career as a swing trader.

Get past your setbacks

There will be ups and downs in the stock market. The profits are always great to have but the losses also would feature sometimes. Try not to take them to heart or brood over them. Moving on after learning from your mistakes is what will work. 

Accept what happens

The market can be unforgiving but it also gives generously. Accept all that comes your way and that motto will infuse you with a lot of positivity and optimism. That is also the best way to enjoy what you do for a living or as a hobby. 

Record your emotions

It is a great idea to keep a diary or a journal of not just your trades but also of your mental and emotional state of mind. That can be part of your overall learning process as a trader. 

So how to maintain a swing trading journal?

It’s quite simple, really, to get a swing trading journal going and also to maintain it. It is a personal diary and there is no hard and fast rule here but to make it valuable. 

How to get started and keep up the habit

Start small so that you can kick start the habit and let it grow. Promise yourself to make at least one entry daily and then build from there. Set a time for this, whether first thing before you start work or the last. 

Keep your entries crisp and short but meaningful. Writing too much is time consuming and difficult to read later. 

Give your journal and the entries a structure and a format. It becomes easier to compose your writing and also handy in pulling out information later. 

Have fun while you are maintaining your precious journal. Whether you are writing in an actual diary by hand or using a basic MS document or even software, enjoy the process of recording your inputs and owning your journal. 

Tips to maintain your journal 

Here are some tips to make it useful and some mistakes to avoid:

Start with jotting down the basics of the trade itself. You could include the date of buy, sell and the respective prices and how long you held on. 

Give it some added texture by stating your level of difficulties encountered on a scale of, say, 1 to 5. Add additional details of your mood and how the market conditions affected it and impacted your decisions.

An important point to ponder on and learn from is mentioning your highs and lows, right decisions and mistakes as learning for the future. 

Tips on what to avoid 

Write only enough to record the key takeaways. 

Record not just the lows but the highs too. It is important to make entries of what you got right and where you succeeded and not just confine the journal to mistakes.

Make sure you do not just keep a diary of events as they happened. It needs to also be a note of what you learned and how those events can help shape your future decisions. 

Be as specific as you can and make your notes count with a clear learning and takeways. More than the events themselves, you should be able to identify outcomes and solutions that can help you grow. 

Swing trading tips

Connect with other traders

Like any other job, connecting with your fellow traders who've already discovered smarter investing strategies in multiple types of assets can be of help. You could join forums and discuss strategies and exchange ideas and experiences with other responsible traders. 

If you’ve set rules, stick to it and never overtrade

Over-trading is one of the main reasons why traders fail. Once you have created rules and guidelines around your trading strategy, stick to it.

Learn technical analysis

To identify trading opportunities, capitalise on them and maximise your returns, you need to learn the ropes of technical analysis. 

Backtest before you trade it

Always backtest a trading idea before you trade it.

Finding the right strategy that works takes a lot of effort and you have to keep in mind that no strategies last forever. If a strategy stops working, try to create new strategies or tweak your current one.

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