In simple terms, swing trading is a popular way of trading where traders keep their positions for more than a day. Unlike day trading, swing trading doesn’t require traders to close their positions within a day. Swing traders focus on a larger part of the market and wait for a favorable opportunity to trade in the direction of the trend. Swing trading is considered a fundamental form of trading, but why is it so?
Swing trades last longer than a day but shorter than trend trades, which can last for weeks or months. Swing trading falls in between these two extremes and aims to profit from short-term price movements resulting from changes in a company’s fundamentals. The key to successful swing trading lies in selecting the right stocks that have the potential to grow in a short period. While waiting for a larger profit opportunity, swing traders make several small wins that contribute to their overall profit. This approach allows them to accumulate a substantial volume of profit. However, to minimize risk, swing traders set their stop loss level at 2-3 percent and maintain a profit-to-loss ratio of 3:1. This strategy helps them avoid risking too much, as a significant loss can outweigh the gains made from smaller swings. Therefore, swing traders are careful in choosing the stocks to trade in order to avoid making mistakes.
Picking Up The Right Stocks
The first and most important step in successful swing trading is choosing the right stocks. It’s crucial to make sure that the stocks you select are on an upward trend. Additionally, these stocks should have sufficient trading volume and liquidity in the market. Large-cap stocks are considered suitable for swing trading because they tend to experience significant fluctuations between high and low points in an active market. Swing traders take advantage of these fluctuations by trading in the direction of the trend and adjusting their position when the trend changes in the opposite direction. They ride the wave of the stock’s movement to maximize their profits.
Selecting The Right Market
Swing traders find a moderate market more favorable compared to when the market is strongly bullish or bearish. In extreme market conditions, even the most active stocks behave unpredictably and do not exhibit consistent swinging movements. That’s why swing traders prefer a stable market where indexes remain within a certain range for a few weeks or months.
In a stable market without significant bullish or bearish influences, indexes follow a pattern of rising for a period and then falling, similar to a wave. During these ups and downs, swing traders have numerous opportunities to make profitable trades. Therefore, correctly identifying the market’s impulses plays a crucial role in swing trading success.
But what should swing traders do when the market is either strongly bullish or bearish?
Swing Trading In A Bullish Market
When the market is experiencing a rally, swing traders align their trades with the prevailing trend. In a bullish phase, stocks that are trending upward often exhibit a gradual staircase-like pattern, with temporary pullbacks followed by continued upward movement. This pattern is typical during an uptrend. Swing traders who are capitalizing on the bullish trend aim to capture those short moments of price dip followed by a rise.
Successfully taking advantage of a bullish market depends on two main factors: planning the entry point and identifying the lowest point of the pullback to set the stop loss (SL) limit. An experienced trader plans their entry when the next price candle is formed in the upward trend after the dip and sets the SL limit at the lowest point of the subsequent pullback. Additionally, they identify the highest point in the trend, which represents the profit level. The difference between the entry point and the profit level determines the potential gain from the trade, while the difference between the entry point and the SL point represents the relative risk.
To ensure a profitable trade, the potential reward should be at least twice the size of the approximate loss, or the reward-loss ratio should be 2:1. This means that the potential gain should be double the potential loss, creating a favorable risk-reward ratio for swing traders.
Bear Market Strategy
Swing trading in a bearish market is more challenging compared to a bull market. The reason is that bear markets are often more volatile and prone to frequent shifts influenced by traders’ sentiments. However, bearish runs are typically shorter in duration than uptrends, and an underlying bullish force helps prevent the market from spiraling out of control. One strategy for bearish swing trading suggests that traders should either stay in cash or refrain from swing trading if they are uncertain about their strategy’s effectiveness in the ongoing market conditions.
Similar to a bull market, a bear market also experiences moments of fluctuations, although they may not be as orderly. Experienced traders look for opportunities to trade during these brief counter-trends when the market continues to decline.
For entering a trade, the plan is to wait for the price to be lower than the previous day’s low during the counter-trend. Similarly, a stop-loss limit is set above the highest point reached during the current counter-trend. Once the stock price reaches that level, it’s time to exit the market to minimize losses. Conversely, a profit target is set below the lowest price candle observed during the current downtrend, and traders can exit the trade to secure some profits when that limit is reached.
Swing Trading Strategy
Swing trading strategy involves using both fundamental analysis and technical analysis.
Fundamental analysis is a method used to evaluate the true value of a stock. Traders conducting fundamental analysis analyze various factors that can impact the stock’s value, including macroeconomic conditions, the company’s financial performance, economic trends, sector performance, and more.
In addition to fundamental analysis, swing traders heavily rely on technical analysis. Technical analysis involves studying price charts and using various indicators to identify patterns, trends, and potential entry and exit points for trades. If you want to gain a better understanding of swing trading strategies and indicators, you can explore detailed resources on these topics.
The Bottom Line
Swing trading involves trading strategically in line with the trend. Instead of aiming for large profits in a single trade, swing traders patiently wait for the stock to reach their desired profit level before selling. This approach is often recommended for beginner traders, but intermediate or advanced traders can also engage in swing trading.
Swing trading doesn’t require excessive time commitment like scalping or day trading, as it allows profits to develop over a longer period. However, to be successful in swing trading, you need discipline and a good understanding of technical analysis to make profitable trades.