Investing made easy: How to make profit from using Swing Trading technique

Meaning & Definition

Swing Trading is a strategy that focuses on taking smaller gains in short term trends and cutting losses quicker. The gains might be smaller, but done consistently over time they can compound into excellent annual returns. Swing Trading positions are usually held a few days to a couple of weeks, but can be held longer.

How Swing Trading works for traders

Swing trading seeks to capitalize on the upward and downward “swings” in the price of a security. Traders hope to capture small moves within a larger overall trend. Swing traders aim to make a lot of small wins that add up to significant returns. For example, other traders may wait five months to earn a 25% profit, while swing traders may earn 5% gains weekly and exceed the other trader’s gains in the long run.

Most swing traders use daily charts (like 60 minutes, 24 hours, 48 hours, etc.) to choose the best entry or exit point. However, some may use shorter time frame charts, such as 4-hour or hourly charts.

Let's start with the basics of a swing trading strategy. Rather than targeting 20% to 25% profits for most of your stocks, the profit goal is a more modest 10%, or even just 5% in tougher markets. Those types of gains might not seem to be the life-changing rewards typically sought in the stock market, but this is where the time factor comes in.

The swing trader's focus isn't on gains developing over weeks or months; the average length of a trade is more like 5 to 10 days. In this way, you can make a lot of small wins, which will add up to big overall returns. If you are happy with a 20% gain over a month or more, 5% to 10% gains every week or two can add up to significant profits.

Of course, you still have to factor in losses. Smaller gains can only produce growth in your portfolio if losses are kept small. Rather than the normal 7% to 8% stop loss, take losses quicker at a maximum of 3% to 4%. This will keep you at a 3-to-1 profit-to-loss ratio, a sound portfolio management rule for success. It's a critical component of the whole system since an outsized loss can quickly wipe away a lot of progress made with smaller gains.

Swing Trades vs. Day Trading

Swing trading and day trading appear similar in some respects. The main factor differentiating the two techniques is the holding position time. While swing traders may hold stocks overnight to several weeks, day trades close within minutes or before the close of the market.

Day traders do not hold their positions overnight. It often means they avoid subjecting their positions to risks resulting from news announcements. Their more frequent trading results in higher transaction costs, which can substantially decrease their profits. They often trade with leverage in order to maximize profits from small price changes.

Swing traders are subjected to the unpredictability of overnight risks that may result in significant price movements. Swing traders can check their positions periodically and take action when critical points are reached. Unlike day trading, swing trading does not require constant monitoring since the trades last for several days or weeks.

Most Used Swing Trading Indicators

1. Moving Averages

Moving averages are simply the average of the stock prices over a given period and smoothen out any erratic short-term spikes.

They are referred to as the lagging indicators as they don’t look back over past price action. Thus, Moving Averages are mainly used for confirming trends and used in swing trading.

Moving Averages can be categorized into short-, medium- or long-term, based on the number of the periods such as 50- or 200-days moving average.

Moving Averages are mainly of two types :

Simple moving averages, which take all the closing prices of a specific period and averages them out, and Exponential moving averages that give more weightage to the price which is closer to the current date.

Having discussed the basics of moving average, let’s see the use of this indicator in swing trading :

Swing traders use moving averages when a market’s short-term Moving Average crosses a longer-term Moving Average indicating that a change in momentum is taking place. When a faster Moving Average crosses a slower Moving Average from below then it indicates a bull move. When a faster Moving Average crosses a slower one from above, then the momentum may be reversing to a bearish move.

2. Volume

Volume is an important indicator in swing trading as it tells us about the strength of the ongoing trend. Usually, a trend with high volume is stronger than one with weak volume. As more traders buy or sell, it forms a better basis for the price action.

Volume is crucial when there is a breakout in the trend. Generally, breakouts follow a period of consolidation accompanied by low volume. So, when the breakout occurs then volume spikes.

There are different types of volume indicators that signal whether the volume is rising or falling in the stock.

3. Relative Strength Index

Momentum Indicators are popular among the swing traders and especially Relative Strength Index, which shows whether the stock’s prices are in overbought or the oversold zone.

Usually, when the prices are above the 70 levels, then we considered it in the overbought zone, on the other hand when the prices are below the 30 levels, it is considered to be an oversold zone.

When the prices are in the overbought zone, it usually indicates the prices may reverse to the downtrend, and when the prices are in the oversold zone, it usually indicates the prices may reverse to an uptrend.

Thus, this indicator can be used in swing trading, as it tells us when the trend is going to reverse.

4. Stochastic Oscillator

The stochastic oscillator is another type of momentum indicator that works almost similar to the RSI. This indicator compares the closing price of a stock to the range of its prices over a particular period.

Like the RSI, the stochastic oscillator also shows the overbought and oversold zone. In this case, 80 is usually considered as overbought while under 20 is oversold. However, it comprises 2 lines, unlike RSI. One shows the current value of the oscillator whereas the other shows three-day MA.

Advantages of Swing Trading :

Less Time:

Generally, intraday traders have to monitor their positions every minute. However, as Swing Trading has a predetermined horizon, it takes less time to execute and in monitoring the positions.

Short-term profits:

Swing Trading allows investors to make quick and short-term profits by capturing the bulk of the current trend and market swings. If the trend is upwards, Swing Trading can allow investors to make hefty profits in a short period.

Indicators:

Swing Trading includes the use of technical analysis and fundamental analysis. As the included indicators are reliable and used by almost all the investors, Swing Trading becomes less risky when compared to other short-term financial instruments.

Flexibility:

One of the most important advantages of Swing Trading is that it doesn’t legally bind an investor to sell the shares after a specific time. If you are at a loss after your set time horizon, you have the complete freedom and flexibility to hold the shares for a longer time. Under Swing Trading, you do not have to sell your positions at a loss.

Financial goals:

Swing Trading can allow investors to achieve their short-term financial goals without having to cover the expenses with their savings. Swing Trading provides these investors with a way to invest their savings for a short period and remove their invested amount along with the profits.

Finally, Swing traders use various strategies more experienced traders will use advanced and complex techniques. However, these simple strategies will help you lay a strong foundation. Whether swing trading is your style or not, you can’t deny the importance of learning the various trading techniques to become more surefooted in the stock market. When it comes to stock trading, nothing can beat the power of knowledge.