Swing Trading – Concept, Techniques, Workings, Benefits, Risks & more

Swing Trading is one of the most important aspects of trading. Traders can choose any style of trading they wish to, and Swing trading is adopted by a good fraction of traders.

It is a rather exceptional choice for trading, wherein decent returns can be fetched.

In swing trading, you can gain in stocks and trade them along with the time frame of days or over a few weeks.

In this article, you will get to learn more about Swing Trading, its aspects, how it works, how to start, risks, benefits, and much more.

Let us have an in-depth look at this trading style.

What is Swing Trading?

Swing Trading is when you trade for a reasonable profit where the time of buying and selling the stocks can vary from days to weeks only.

Swing Trading has a higher accuracy rate with a success rate. It is good and highly reasonable for beginners.

It gives you a consistent and reasonable income. Technical Analysis and Fundamental analysis is a key factor for Swing Trading.

However, with great benefits come great risks. Swing Traders are moderately exposed to weekend and overnight risks.

There are a consistent risk and reward ratio based on profit target and stop loss. Price action movements or technical analysis can estimate future losses effectively.

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How does Swing Trading work?

Swing trading seeks to profit from short term market ‘ups’ and ‘downs’. For example, a particular stock may hover around the same price over a few months in a stable market.

However, it tends to oscillate through ups and downs within this period. This is exactly what this trading style seeks to benefit from.

The short-term and interim upswings and downswings within the securities price trend.

Different swing traders may follow different means of executing their trades so as to maximize their profits.

Broadly however there are certain vital steps that can help in successful swing trading:

Identify Tradeable Securities

The first thing a swing trader does is identify a security whose price movement charts shows a trend of ups and downs. A swing trader can achieve this by maintaining a stock tracker.

This way he can follow the market so as to identify stocks which are being actively trading as well as that follow certain price trends.

Selecting Price Chart

Swing traders select and use price charts over a relatively short period. This may range from a few weeks or a few months.

This depends on the time period within which the security reflects a visible price trend.

Technical Analysis

The next step is to analyse the charted price trend using various technical analysis tools.

The intention of the technical analysis is to identify profitability opportunities so as to generate buy and sell signals. For the sake of example, we will consider the channel trading tool.

A study of the price chart can reveal the ‘channel’ or the range of prices within which the security seems to oscillate within the considered time period.

A swing trader could place a buy signal close to the lower channel and a sell signal close to the upper channel.

Risk Assessment

A stop loss signal could be placed at a predefined level below the lower channel. This is for situations in which the price begins a downward trajectory and breaches the lower channel.

At this point, the swing trader can close the trade and cut his losses. This is to ensure that even if the trade results in a loss, it will be capped at an acceptable limit for the swing trader.

The risk appetite of the swing trader guides placing of the stop loss signal.

Modification of Pre-Set Signals

Typically, once the price upswings towards the upper channel, the swing trader can square off the trade and book his profit.

This can be however be subject to the discretion of the swing trader.

For example, if the price quickly breaches the upper channel, an expert swing trader may choose to modify his sell signal to earn higher profit.

An amateur swing trader may on the other hand, complete the trade and book his profit immediately.

Timing here is key. The intention is to earn smaller returns in a short period to eventually amass high returns overall.

More Information on Swing Trading & Styles of Trading 

Swing Trading Techniques

Swing trading techniques involves looking at the chart patterns multiple times a day. The common char patterns being the triangle, flags, head, and shoulders, cup, and handle pattern.

Candlestick patterns are used for a great trading plan. There is no set plan or tactics for a trade that can predict a profit or loss.

The tactics that you see regarding this trading technique are comfortable zones of an individual trader.

They have experienced great results with it and thus using such techniques. You can go for a different combination or technique to get a much higher profit.

As a beginner, it is highly recommended that you stick to its common techniques. You can go to one of the following techniques as well.

Fibonacci Retracement

Fibonacci retracement is one of the greatest assets of a Swing Trader. It helps to identify resistance levels, draw support lines, and also in setting target prices.

There are Key Fibonacci ratios viz. 23.6%, 38.2%, 50%, 61.8% and 100%. A trader usually sets two extreme points on the Trading chart.

The vertical distance is then divided by the Key Fibonacci ratios. However, you cannot rely fully on it as it involves risks as well. It is wise to use this tool with other indicators.

Japanese Candlesticks

Candlestick chart helps represent the flow of the stock market thus creating a virtual representation of price direction.

Traders use data from multiple periods to form single price bars. Price movements are described using a Japanese candlestick or simply candlestick chart.

Here the four components viz high stock, low stock, opening stock, and closing stock are merged into one.

T-line Trading

T- Line is the 8 EMA or the 8 Day Exponential Moving Average. T-line is one of the most reliable techniques in Swing trading.

This is one of the techniques which have bought much more benefits than the loss to the traders. T-line is a trigger point or tradeline for exits and entry of trades.

If a trade goes above the T-line it will tend to go up and thus a great profit shall be earned. The same is true for the downward trend where the ending stock closes below the T-line.

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How to start Swing Trading?

Here the few things you must do start swing trading & do it in right way –

Finding the Right Stocks

Often discussed question about swing trading is what stocks we should trade for and how to pick the right stocks.

Select stocks that have a trend of extreme highs and extreme lows. These are also known as large-cap stocks.

The pillar of this trading style is finding the right stocks. Low-priced stocks are the key here but how do you know it is low and cannot go down? Thus it is useless to vouch for wrong stocks.

Sometimes it can be challenging, where stocks tend to display unexpected waves even if the indicators are stable for weeks or more.

Right Timing of Entry and Cashing Out

To play safe you need to find the stocks which are in stable positions with low ups and downs for a greater period. This will help you to find out the right time to trade-in for a stock.

The best environment for swing trading is when the market has predictable oscillations over a greater period.

Then you will have a great set of opportunities to cash in for small profits. Pattern repetition is a quintessential factor while you are trading.

Gathering Extensive knowledge about stocks and stock market

Usually, it is impossible to learn all the aspects of trading in one go. People often go to a trading academy, giving training regarding stock markets.

They will teach you every aspect of the Stock Market. Most importantly they will teach you how to capitalize or predict a stock price and the rest is upon your experience.

The common thing that you will learn in an academy is the technical aspects or indicators of a stock market, pivot points, gaps, and alerts.

However, as discussed earlier, EMA or Exponential Moving average is one thing that you should highly focus on.

EMA is the moving average of stock prices calculated using the latest data. EMA helps to predict the entry, exit points as well as the highs and lows.

The efficacy of this method is quite high which is why traders prefer it most. There are many types of EMA.

Beginners are recommended to use the EMA system which is quite clean and handy to use. The system will give you alerts for a long entry.

It will also tell you the reversal of a trend so that you can use a timely exit from your long position.

Planning a Strategy and Implementing it

Having a plan and sticking to it is one thing that you need to stick up in your mind while doing swing trading. There can be times when you know what the trend is.

Sometimes mouth-watering opportunities may come which may insist you to cash in for a profit or save yourself from a loss.

Sticking to the plan may help you to get a higher profit which is much more than the profit in the previous scenario.

Winning in the stock market can be directly proportional to how controlled emotions you have when you are actively trading.

Calculate the Risks before Diving in

Risk is another factor that develops fear in the mind of a trader making him less confident. Some people take bigger leaps eliminating the factor of risk.

Others rely on small trades so that they don’t incur huge losses. Finding the limits and sticking to them is also necessary.

Instead of going for a day trading or short time swing trading, go for longer periods. Several news channels give live trends in the stock market.

Utilizing this platform is always a plus as it benefits the trader. These platforms will give you in-depth stock market analysis beneficial for your trading knowledge.

Having extensive knowledge about the stock market is a must. To develop strategies you will need a lot of information which you will acquire from learning more about the stock market.

The key is to find a strategy that works for you and around your schedule. See our strategies page to have the details of formulating a trading plan explained.

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Benefits of Swing Trading

Like any form of securities trading, swing trading too has several advantages. These include:

Applicability to a variety of instruments

Swing trading can be executed in trading of a variety of securities. The only criteria being that they should be listed.

Different types of securities have different price behavior patterns. They also respond differently to circumstances in the economy.

This can create a plethora of profitable trade opportunities for swing traders no matter how the economy is placed.

Less Cumbersome

While swing trading does require monitoring of the price trends, it is far less cumbersome than day trading.

This is because it extends over several days. Thus, it does not require continuous monitoring as is required in day trading.

In fact, buy and sell signals can be pre-set into the technical analysis tools based on the price trends.

Automated Tools

Swing trading may seem to involve complex technical analysis. It must be kept in mind that several of these tools are now automated.

There are several software and online tools available that have pre-loaded technical analysis tools.

The software takes over the charting process so that the swing trader focuses more on forecasting price movements based on these charts.

Return Potential

Swing traders look to book their profits over the short term. They take trade calls in which they foresee booking of profit in the near term.

As profits are immediately booked, albeit at small percentages, it can accumulate higher returns over the longer duration.

Drawbacks of Swing Trading

Here are the various disadvantages of Swing Trading –

Knowledge Required

Achieving success in swing trading requires a thorough understanding of the technical analysis techniques as well as the tools available to apply them.

Without adequate understanding and knowledge, a trader is unable to generate timely and profitable buy and sell orders.

Loss Susceptibility

Like any form of securities trading, swing trading is also susceptible to losses. Technical analysis tools are guides in this form of trading.

They cannot however predict price movements with certainty. Ultimately the success relies on forecasts. This contributes to the loss susceptibility of swing trading.

Overnight Risk

As compared to day trading where positions are squared off within the same trading day, swing trades carry on for several days.

Swing traders are thus exposed to what is called ‘overnight risk’. This is the risk of significant economic changes that may occur overnight.

These changes occurring between trading sessions may adversely affect market prices. This can throw the set swing trading strategy off-track.

Costs Involved

Swing trades are squared off within a short period of a few days to a few weeks. This means executing several trades for earning a sizeable return.

Each executed trade comes with its brokerage costs. Short term trade gains are also generally subject to higher tax levies.

This can make swing trading an expensive proportion as compared to long term trading.

Risks involved in Swing trading

• There is an overnight and weekend market risk involved in Swing Trading. These are the times when the stock markets are non-operational. The results of those periods show effects from the next opening session of the market.
• You may incur high losses over unprecedented market reversals and which can come out of the blue.

Swing Trading vs Day Trading

Day Trading involves trading stocks within the same day whereas Swing Trading can be done over weeks as well as months.

Different Traders have a different approach to both the trading techniques. It highly depends on the requirements of a trader through which a trader chooses a technique.

Some traders rely on Swing Trading while others go for Day trading. At the end of the day, it is highly dependable on the requirements of the trader.

There is a 2:1 reward ratio involved in Day trading. A trader will acquire a loss of 0.5% in Day Trading. If he gains then it will be 1% which is double the original amount.

With fewer trading fees and fewer risks here, a trader will be able to add almost 200% yearly.

Swing Trading has a much slower pace of profits and losses than day trading. Certain swing trades can give a trader unexpected gains or losses.

Swing Traders uses technical analysis to buy or sell stocks and thus there are various ways and strategies involved.

However, the 3:1 risk/profit ratio can lend a profit percentage of 36 annually and 3% monthly.

At the end of the day, Day trading has a higher chance of profits than Swing Trading but on smaller accounts.

Once an account starts to build up, it gets much harder to acquire great profits. The reason being difficulty in utilizing capitals on day trades effectively

Conclusion – Swing Trading

Swing Trading is one of the best practices in the world of trading. With the right strategy, you can make quite a profit from trading.

Profits can go anywhere from 2 to 10 percent while in swing trading. Blindly following a single strategy is just bogus because the stock market consistently changes.

Your strategy may have worked today and has the highest possibility to fail tomorrow. For every new trend set a new strategy and stick to it.

People often lose direction when they see huge profits. Learning new things about trading and keeping yourself up to date about the stock market is a must.

Follow the TV channels and sources that give in-depth analysis and the latest trends of the stock market.

Sources can be manipulative at times and thus at the end of the day, you should follow your basic instinct while making a trade.

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