Swing Trading in the stock market – All you need to know

Swing trading can generate additional income for your portfolio by improving your overall return. Many traders are using it for their living.

Many traders take swing trading part-time in addition to their full-time job. If you want to consider it as full time then you should do a thorough analysis before getting in.

In a strong uptrend, swing trading can be profitable as prices for most of the stocks will be moving higher. On the flip side, when the market is in a downtrend, you will not have much profit. 

In a downtrend, traders prefer short selling. However short selling can be costly if executed incorrectly. Instead of going for short selling, many traders also prefer to sit on the sideline.

In this article, we will discuss what is swing trading and all the basics you should know to become a swing trader.

What is swing trading?

In swing trading, traders make a profit from stock’s short term price movements. These traders wait for low-risk opportunities for a short term spanning a few days to a few weeks. Which means its a strategy that is intended to capture a swing. You basicaly take advantage of short term price movements of a stock.

The main objective is to capture a chunk of a potential price move before the market reverse.

Market participants who do swing trading are known as swing traders. Here are the steps followed in a swing trading strategy;

  • Identification of stocks whose price is likely to move;
  • Out of the list, select stock to trade;
  • Based on your technical analysis buy the stock; and
  • then as per the existing strategy, sell the stock at a predefined point to capture a chunk of profit.

It’s not necessary that swing traders take position only on one stock or security. Based on their strategy, level of expertise, and plan, they can take a position in more than one stocks or securities.

Swing trading based on a particular event is known as event-driven trading. Certain traders wait for specific events and then trade security based on their expectations of how this event will drive a security’s price.

Swing trading can be used to trade in forex, futures, options, and ETFs.

How swing trading is different from intraday

In intraday, which is also referred to as day trading, traders hold a stock anywhere from a few seconds to a few hours but never more than a day. These intraday traders monitor minute-by-minute price movements and decide the entry point and exit on the same day.

Day traders are more concerned about market participants’ psychology, price movement, the noise of the market, and money management. They are less concerned about the fundamentals of the company.

As the holding in Swing trading is for a short term period, the company’s fundamentals play an important role in addition to technical indicators in selecting stocks.

In swing trading, traders hold their position for a short term period spanning several days to several weeks even months, which should be more than one day. 

Therefore, the major difference between swing trading and day trading is the holding period of securities. The holding period in case of a swing trading is longer than the day trader’s holding period.

In both intraday and swing trading, the major concern is commission and taxes. Therefore many swing and day traders go for a discount broker which charges fewer commissions in comparison to a full-service broker.

How fundamental and technical analysis can help you in swing trading

Swing traders use technical analysis to decide whether to buy or sell security using chart patterns of technical indicators. By using fundamental analysis they select the stock to trade. 

In fundamental analysis, they look at each and everything that affects the company’s earnings.

The importance of fundamental analysis in stock picking depends on the investment horizon. The longer your investment horizon, the more important fundamental analysis becomes. 

Fundamental analysis will tell you in which way the wind is blowing, but the technical analysis will tell you when to buy and sell, and most importantly the timing component. Therefore, in swing trading both fundamental and technical analysis is important.

Important points to be a successful swing trader

To be at the top of your game you should always protect your capital, learn from the market, should have the ability to take stress, be disciplined, be unemotional, and stay informed.

As experts suggest the best part of a swing and intraday trader is money management. You should manage yourself in such a way that you should always have enough capital to come back and trade again.

If you are new to the stock market, we suggest you to first go for paper trading to know how your strategy working. After getting confidence, you can start with just a small portion of your portfolio in swing trading so that any early mistakes will not prove too costly.

Before getting into trading, you must understand and have thorough knowledge of stock market basics, fundamental and technical analysis

Here are certain important parameters you must be aware of before getting into the swing trading;

  • Liquidity
  • Market volatility
  • Supply and demand for shares
  • How to manage risk and diversification.
  • A trading plan with entry and exit strategy
  • How to limit your losses on an individual stock level and at a portfolio level.
  • Understand what drives price movements in the stock you trade.
  • Price and volume relationship
  • Charts and patterns
  • Top-down approach
  • Bottom-up approach
  • Moving average crossovers
  • 50MA – 50-period moving average
  • Support and resistance
  • Cup-and-handle patterns
  • Head and shoulders patterns
  • Flags
  • Triangle
  • Candlestick charts and patterns

To become a successful swing trader you have to be well rounded.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.