What Is Swing Trading? All You Need To Know


If you’re trading in the stock market, you might have heard about what swing trading actually is. And before you jump right into it, you might ask “what is swing trading?” And you want to learn more about it. Many investors find swing trading more lucrative than day trading. One reason behind this is that many a times day trading might have backfired on them. A lot of investors start out looking at this as a hobby and end up with a very lucrative and rewarding career.

When you look into swing trading, you will find a great number of online resources and quality articles out there on the internet. In addition, there are several books written on “what is swing trading”. And many of them are very informative and accurate that you can turn to. You can find a boat load of swing trading books in Amazon.

Podcasts and free online swing trading courses like Free Online Udemy courses for technical studies are excellent sources of information. If you choose them carefully, you will be able to assimilate a lot of good workable knowledge. This is simply a great way to learn about anything. YouTube is  a great source  for gathering workable  knowledge  for FREE.

Why You Go for Swing Trading?

Swing Trading is a kind of strategy that usually aims at taking smaller profits in short term trends and cutting losses faster. If you do it correctly you can open the floodgates of consistent profits. And thus they can compound into excellent annual returns. The positions are usually held a few days to a couple of weeks, and sometimes they can be held longer.

Swing Trading is a great way to get you ahead of a regular stream of income if you play it correctly. No one can deny that long-term investment is the best way to accumulate real wealth. And for this, you need to research the fundamentals and understand the underlying business of the company.

But in case of short-term swing trading, you have to fine-tune your technical knowledge.  Even a little bit of fundamental study also helps you greatly. Swing trading is better than day trading as the day trading or intra-day trading requires a greater level of professional skills to get success.

What is Swing Trading and How Does Swing Trading Work?

Swing trading is a short-term trading method that aims to take profits from trading in stocks and its derivatives over a period of a few days to several weeks. This actually is the basic swing trading definition. Swing traders usually employ technical analysis for finding trading opportunities. Apart from technical analysis, many professional traders consider fundamental studies such as quarterly results, and any positive or negative news that may have direct impacts on a stock’s price movement.

Instead of day trading, many professional traders prefer to go for swing trading. This is because of the fact that changes in fundamentals usually require several days to cause sufficient price movement to give you a good profit. The primary goal of swing trading is identifying the trend of a stock and then cashing in profits with trading within that trend. This method virtually applies to all sorts of financial instruments including swing trading forex.

Most professional swing traders take advantage of the main trend unlocks on the chart. If the stock is in an uptrend (bullish), the trader will go long by buying the stocks or call options or futures contracts. If the trend is down or bearish, the trader could short-sell shares or futures contracts, or buy put options. A lot of professional traders write put options or call options, instead of buying them. 

Is Swing Trading Profitable and How Much Can You Make? 

If you do it correctly, you will definitely make money with swing trading. 
I am giving you an example of NYSE stock-Twitter(TWTR) below for your reference (Click chart to zoom in for clearer view). Here Swing High was the major top of the first move of an up-trend, followed by Counter-trend or pull back (retrechment).

Pull back low, the area where support exists is an idle zone to go long with the stock at around $30 level. When the up-trend resume again after the pullback, you can easily captured profit that is more than 50% for around $15 pure profit. And, your Stop Loss area is obviously a few points below the swing low.

Many a time, the price of a stock is moving with neither a bullish nor a bearish trend, but the stock is swing between a parallel resistance and support areas with predictable patterns. When the price of the stock moves up and then pulls back, touching the highest point reached before it pulls back is the resistance. And when that price continues to drifting down at the lowest point reached before it climbs back is the support. In this opportune scenario, swing traders usually take a long position near the support area and taking a short position near the resistance area.

What Are The  Best Stocks for Swing Trading?

Finding the right stock is the first key for successful swing trading. All you need to consider is some good quality high beta stocks. If you want to trade safe, the large-cap or F&O stocks could be your first priority. This is because those are the stocks that are the most actively traded stocks. These stocks usually swing between high and low extremes. That’s why the swing traders are able to ride the wave in one direction for a couple of days or weeks.

If you take a higher degree of risk, then you may consider good quality low float stocks. Low float stocks are those that are available for public trading with a relatively low number of shares. Low float is prone to higher volatility and price variations. This makes them a preferred choice for day traders. They may be a good option for up-trending situations. But you’ll be in a great trouble if a low float stock crashes against your expected move.

How to Select Best Stocks for Swing Trading in India?

Selecting the best stocks for swing trading in India is cumbersome job and sometimes deceptive. For this reason, you need to find high beta and highly volatile F&O category of stocks like RIL, Infosys, ICICI Bank, HDFC Bank, SBI, and many of this kind. Finding low float stocks could a big trap for you to get into. For this, you need to do more fundamental research before getting into them.  

Swing Trading When You Buy Stocks:

Trending stocks mostly move in a zigzag fashion, instead of a straight line. A stock might trend up for several days and then pulls back for the next few days before it resumes its uptrend. If you see a price bar chart, you will able to find this zigzag formation in the chart. For an up-trending stock, you will see that the price is moving up making higher highs and higher lows. This kind of predictable trend is defined in the Dow Theory.

As a bullish swing trader, your job should be to catch the up-trending movement of a stock for making some quick bucks. And for this, you need to have enough patience and discipline to make the story successful. Waiting for a pullback or counter-trend near the support area is a wise thing to consider. After that, you naturally want to see a resumption of the initial upward trend.

Swing Trading When You Sell-Short:

Whenever you find an opportunity to cash in the trend of a weak stock, sell it around the strong resistance area on the daily or weekly chart. If you want to put a stop loss to help minimize the unexpected loss, do it a few points above that highest price point. This will give you an excellent reward-to-risk ratio for your trade.

Short-selling is a process of borrowing shares from your broker and selling them in the open market. But you must buy the shares back again in the near future. If you buy them back at a lower price than your purchase price, you make profits after deducting brokerage charges and taxes. On the other hand, if you buy them back at a price higher than the short-selling price, you make losses.

Swing Trading or Positional Trading Vs Day Trading

Simply knowing ‘what is swing trading’ and what is a day trading, may make you confused a little bit. Swing trading and day trading may sometimes sound similar in character, but they are not. The time frame is the major difference between them.

1. Day trading is all about buying and selling securities that stretch a couple of minutes to hours and must be concluded within that day. Swing trading can run over days or several weeks. Positional trading is somewhat similar to swing trading. In postional trading, the holding period is a bit longer that ranges from several weeks to many months. 

2. Day traders can hold their positions for a shorter time frame, but can’t hold them overnight. That’s why day traders can avoid the overnight holding risks of gap opening the next day. You never know how good news or bad news will impact the price of your holdings positively or negatively.

Any news announcements that come after market hours can cause a big move of the stock price on the next day opening either way beyond your wildest dream. Swing traders often tend to end their trading day worrying how their holdings open the next day significantly different from how it closed the day before.

3. There is always the additional risk of trading with a shorter time frame. That’s why day trading often associates with higher risk factors. Additionally, you often fall in the trap of accepting greater leverage and margin trading offered by the brokers. And the brokers also take advantage of that by giving you a wider spread between the bids-ask price and inflated commission structure. This can ultimately eat away a large portion of your profits. Swing traders can manage to avoid this situation to a greater extent.

4. Trading with the margin that gives you more buying power is actually a trap for day traders. Day traders often leverage their portfolios with more margins. By taking greater leveraged positions, you actually increase the short-term trading risks to a higher level. You can’t be right all the time.

Any consecutive streak of bad lucks can blow up your account. Sometimes, in an attempt to recoup the loss, you will more dive down to the risk-trap badly. With swing trading, you will be able to reduce the string of losses or a big loss. This is possible due to lower leverage positions and reduces the likelihood of wiping out your portfolios.

5. A day trader usually uses to commit few hours each day to do a lot of researches and monitor price movements of each stock they handpicked. As a day trader, you have to be very smart and vigil to take instant decisions. Any silly mistake can wipe out your capital base. A swing trader, on the other hand, devotes a lesser amount of time to pick the best stocks for trading.

6. Day traders usually do technical analysis and employ advanced charting systems to capture small gains or cut their losses when portfolios move against their anticipated direction. Many a times you fail to pay adequate attention for each of your handpicked portfolios simultaneously. So, in day trading you have to take decisions fast. You will usually do frequent buying or selling of stocks. While swing traders take into account fundamentals, they also do technical analysis of stocks. 

7. Day traders usually devote a lot of time researching to find suitable stocks to trade and work under tremendous pressure to make trading successful. This situation adds an extra level of stress and emotional disruption that sometimes leads to poor trading decisions.

You usually get ample time to make informed decisions based on your technical and fundamental analysis. Here margin of errors is less compared to frequent transactions in day trading. You can check your positions periodically and can cut your position when you get the desired price points without the need for constant monitoring. This allows you to diversify your portfolios and keep a level head while trading.

The Best High Probability Swing Trading Strategies?

After knowing “what swing trading is” and basics of swing trading, you need to look for strategies for getting the desired success in it. Finding a highly accurate profitable swing trading strategy requires a lot of back-testing and paper trading. Swing trading is not for any country specific. Any trader from around the world can enjoy the benefits of swing trading. Swing trading in India is also gaining popularity these days. 

Without any pre-defined strategy and discipline, you will be nowhere to make profits from swing trading. Money management is top of them. You should set modest and realistic profit targets of 5-10% instead of unachievable targets like 20% or more from swing trading of stocks. I know that the grid is a killer for everyone in the stock market.

It’s true that for a great number of instances traders usually repent after the stocks being sold with lower profits. And the moment you sold the stock, you would see a rapid move higher like a rocket. This is very common in the stock market. As a swing trader, your focus should be to lock profit in small chunk over a period of days or weeks. The average length of a trade is usually 5 to 10 days. Thus you can make a lot of small wins, which eventually will add up to big cumulative returns.

One thing is obvious in the stock market and that is a bitter loss. This thing you should always keep in your mind before you start your journey in swing trading. It’s true that a lot of smaller gains can grow your account if you keep the losses in control. Stop-loss strategy is, of course, a better solution to keep your losses under control. And great numbers of traders worldwide follow this strategy with a normal 2% to 3% of Stop Loss. But many a times you would find that your Stop Loss (SL) is hit.

If you keep your stop loss on a percentage basis, there is an every chance that your preset SL would get hit. So instead of percentage SL, it would far better if you keep your stop loss on a technical basis. For this, what you need is keep a daily or weekly price chart open in front of your PC. You’ll have to find the recent low price on the left of the chart and set your SL below that lowest price point. If the SL point is far away from your buy price, either you stop trading or wait for the price to come closer to the SL point. If you go short, the recent highest price is the SL.

On the other hand, for the F&O segment of stocks, if you’re short of fund and familiar with futures and options, you can go long or short with the underlying stocks. If you find a selling opportunity, you can take a shorting position. For future trading, you can only go either for long or short. And in case of an option, you may buy a call for long position or put for short position. And also write a put if you think, the underlying stock is in bullish  trend and write a call if it’s get set for a nosedive.

This way you will be able to initiate swing trading in the futures and options market with a fraction of the cost of the total fund needed for stock trading. But futures and options are very complex instruments. So you need to study the F&O market and stock option thoroughly before you think of them. This is very critical for your overall success because a few silly mistakes can quickly wipe away a lot of progress made with smaller gains.

Can You Get Rich or Make Money with Swing Trading?

Yes, you can. But you should have a little bit of hands-on knowledge for a realistic swing trading returns. If you have patience, discipline, and dedication to learn stock trading, you will be able to earn a sizable income from swing trading. A lot of master swing traders live comfortably from their trading income. A good number of swing traders are doing regular full-time job. And they swing trade to bump into a consistent secondary source of income.

However, the earning potential is depended on your investment capital. And there’s a small group of most successful swing traders who literally make a fortune. Paul Scholardi is perhaps the highest earning swing trader out there in the world. He usually trades small cap, low float stocks with an innovative strategy that is simply mind blowing. He regularly makes thousands of dollars on a single winning trade.

Your income is actually tied to the amount you invest in trading. 5% to 10% is what you could expect to earn from each trade. But you need to be cautious never to risk more than 2% of your trading account on a single trade. As far as possible you need to create your own income projection based on your capital employment.

Before you start your trading journey you should test your strategy by way of paper trades for several months. Or you can trade from a risk-free virtual account without the risk of investing real money. During your initial period of swing trading, avoid expecting high returns, otherwise you’ll likely to lose money very fast.

How Market Sentiments Affect Your Trading

Research and analysis of stocks for swing trading is very critical to make it a success story as its investment horizon is a very short-term affair. So, it is very crucial to find the right trend and definite price movement of stocks. Sometimes you may be confused about how to do market sentiment analysis or technical analysis. The market usually moves in a zigzag way and so the stocks. Hence, finding the right trend backed by market sentiment is not an easy task at all.

There are tons of technical indicators and oscillators out there in the chart patterns which you need to study in detail. Moving averages are great indicators to find a probable trend. But trend confirmation is vital as well. With the help of other indicators such as RSI, MACD, Parabolic SAR and many others, you will be able to end up with a trend confirmation. I personally prefer to study fundamentals like last quarterly results, any recent buybacks, and performing stocks alongside with technical studies.

Swing Trading Indicators: MACD, RSI and Moving Average

Swing Trading Strategy or Trading System that is profitable is very difficult to find. You can create your own Swing Trading Strategy. But it is not that easy to do so. It is not necessary that a strategy fits well for all the shortlisted stocks. It is important to do back-tests and paper trades before you initiate a swing trade. A combination of MACD and Moving Average are worked well as a Swing Trading Strategy. They work in tandem with each other as MACD is based on Moving Average.

Simple moving averages (SMAs) provide support and resistance levels. They usually indicate bullish and bearish patterns. Support and resistance levels can be a good signal to buy or sell a stock. Bullish and bearish crossovers are patterns that signal price points where you should enter and exit stocks. The exponential moving average (EMA) is a variation of the SMA that signifies more importance on the latest data. The EMA gives traders clear trend signals and entry and exit points faster than a simple moving average.

The EMA crossover can be used in swing trading to time the entry and exit points. A basic EMA crossover system can be used by focusing on the 9, 13 and 50-period EMAs. A bullish crossover occurs when 9-period EMA crosses above the 13-period EMA from below and the 13-period EMA needs to be above 50-period EMA. This signifies that a reversal may be in the cards and that an uptrend may be beginning.

RSI (Relative Strength Index) is also an excellent indicator for finding the stock in an extremely oversold zone or overbought zone. What you need here is to find a stock that is exiting the oversold zone and going above 30% from below, if you’re going to buy it and vice versa. (Please see the chart below for live example and click to zoom in for clear view)

Similarly, a bearish crossover occurs when the price of a stock falls below these EMAs. This signals a potential reversal of a trend, and it can be used to time an exit of a long position. When the 9-period EMA crosses below the 13-period EMA, it signals a short entry or an exit of a long position. However, the 13-period EMA has to below the 50-period EMA or cross below it.

What Is Swing Trading Rule for Your Ultimate Success?

For achieving a greater level of success in swing trading, you need to follow 5 Golden Rules. These are the rules I always follow.

1. I never invest in a stock that ran up more than 10% after the buy signal is generated on the chart. If I am using moving average crossover for the buy signal and the stock is already up 10% then I will not consider the stock for swing trading.

2. The second rule is related to trend reconfirmation. You might have heard the phrase “Trend is your friend”. So I always reconfirm the trend by looking for a broader trend on the weekly chart first and then on the hourly chart. If the broader trend is up and so the short-term trend in terms of SMA or EMA crossover, I may consider it as a potential candidate for a buy and vice versa in case of short-selling.

3. I don’t consider stocks for swing trading if there is some news expected that push a stock up or down due to the news. This is because you never know how the news is going to impact exactly the price of a stock. Sometimes a minor flaw in analyzing the news can be detrimental in swing trading.

4. Never try to catch a trending and skyrocketing stock upfront. Leave the price to settle down and retrace a bit. I usually buy them in a support zone.

5. Look for a price breakout of an important horizontal resistance or support level with a spurt in volume on the price chart of a stock. If the breakout with large volume has occurred in the direction of change in price, I will take it for a swing trade.

If the price breaks a strong resistance with greater volume, I will be interested in buying it. And short-sell it in case it breaks a strong support level with a volume spike.

When it’s time to take profits, never be hasty to exit a winning trade and try to apply your judgment as quitting a trade hastily may cause the risk of missing the best opportunity.

Final Takeaways

Swing trading is actually one of the best trading methods for traders. It offers meaningful profit potential. In swing trading, a trend offers greater profit potentiality if you can catch a major trend of weeks or months. But very few traders possess that discipline to hold a position open for long.

To be frank, most fundamental investors are swing traders as changes in corporate fundamentals usually require several days to reflect in the price movement to produce a reasonable profit. But the key here is picking the right stocks for a successful swing trading.

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