Introduction To Swing Trading Stocks

Last Updated July 23rd 2021
7 Min Read

Being successful in the stock market requires understanding and practice of strategies that suit both your trading style and the market conditions. If you are new to trading, have an inclination to technical analysis and can take out some time on most days, swing trading is definitely worth trying.

What is Swing Trading?

If we were to look at the options from a time horizon standpoint, there are short term, medium and long term approaches. A swing trader works in the short to medium term and aims to catch a short-term movement in the price of a stock to turn a profit.

Unlike a day trader who catches intraday fluctuations in price and exits a position the same day, swing trading is about taking a position overnight. But, unlike position trading that holds on to a buy or a sell for months together, a trade in swing trading is held for two to three weeks or a month, at the most. 

Swing trading relies heavily on technical analysis and charts to forecast the potential swings in prices over a period. Based on historical data on the price performances and the current market conditions, swing traders can make an informed decision on how a stock is likely to move now. 

A swing trader is less focused on the long-term fundamentals of the stock or the intrinsic value of the company. Typically, individuals indulge in swing trading more than institutional traders who are more likely to hold positions for the long haul. 

This can be the ideal trading strategy for beginners with an interest and aptitude in the stock markets and want to go a step beyond just investments and try out trading. Swing trading sits in the middle of a short and a long-term trading style allowing for a less hectic yet connected form of involvement with market activity. 

Read More: Complete Swing Trading Guide

Selecting the Right Stock for Swing Trading

There is a question that most beginning traders wonder about. Can swing trading be done with all stocks? Or is there a particular set or type of stocks that swing traders can work best with?

Ideally, stocks that are traded more heavily and actively have a better chance of forming a swing as compared to lesser traded ones. Large cap stocks are good candidates as they have regular movement. These also have adequate data on stock level technicals and historical swing trends to work on. 

Besides the large cap category, here are some other factors to consider while picking the right stocks for swing trading.

A key consideration has to be stocks that have a minimum trading volume per day. These will ensure liquidity to exit positions to book profits and invoke stop loss. 

It is safer to work with the leading stocks of well-known companies that have a track record for transparency and operational integrity. There are lesser chances of unpredictable developments and unwanted surprises. 

Stocks that are regularly traded and develop a pattern in their trades also generate media attention. This, in turn, helps complete the cycle of the stock remaining active and breaking out of its trading range and offering more chances of forming swings with entry and exit points. 

There are stocks that have a high degree of correlation with market indices. When a stock displays consistency in its relation with the overall market movement, it is easier to depend on its technical to chart potential swings. 

Look at stocks that also have a more reliable pattern of movement. Those with a track record of extreme swings and highs and lows can be riskier. After all, as much as you should look at stocks that can get you profits, it is equally important to be sure your capital is safe and losses are avoided. 

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Best Conditions for Swing Trading

So can swing trading be done in all market conditions? Well, as with stock selection too, there are ideal conditions where this strategy works best. Given that a swing trader’s trading window sits somewhere in the middle of short term and long term, there is an added degree of risk in the medium term in which a position needs to be closed.

He does not have the brief, intraday duration to exit a position nor does he have the longer, multi-swing timeline of a trend trader. Any choppiness in the market or any major development that happens after taking a position can be a risk. This need not happen only with the stock or even the industry. It is equally true of any political or economic incident that can threaten to induce market volatility

Therefore, swing trading can be challenging to pull off in extreme bull or bear markets where market sentiments can rule more than technicals. It is difficult to identify and ride a swing in a rapidly rising or a falling market. Taking a longer-term view and doing a trend trade here would be a safer bet. Swing traders find it easier to work in a more steady, settled condition where there are bound to be patterns of ups and downs in a stock that are more short term and driven by proven technicals. 

This also explains why a trend trader has to wait patiently for months to benefit from a bull or a bear market while the swing trader can benefit from the more predictable and proven short term swings. 

EMA

An EMA or an Exponential Moving Average is a weighted average that goes beyond the Simple Moving Average that feeds levels of support and resistance, besides patterns of formation of a bull or a bear market. The EMA goes a step further to share the current data points and trend signals. This crossover is quite helpful to indicate the right entry and exit levels in swing trading.

Baseline

A good approach to swing trading lies in ascertaining the baseline of a stock’s value. This is where the EMA plays a part by helping zero in on its baseline such that a trader can then decide his strategy, whether to go long or short. 

Rather than sheer precision in looking for the absolute low or high of a stock’s price, the baseline is a pointer to the direction of the trend and an indicator to decide on whether to go long or short. 

Profit booking

Seasoned swing traders work around the trend and channel lines to decide the point at which to book profits. These are indicators of the support and resistance levels of the price band of any stock. The precision of this technique depends largely on the nature of the market too and requires close monitoring of the range in which the price is moving. 

In a buoyant market, stocks tend to display a movement in their prices to reach these points where traders can book profits with certainty. If the market is weak, it is important to exit as close to this point as possible to ensure the highest gains and lowest losses. 

Swing trading is a great way to start off as a new trader. You could begin by opening a demo account and practice till you are confident enough to go live.

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