What is Swing Trading for Beginners - Strategies, Meaning, Indicators, & How to Do

Understanding Swing Trading

Swing trading focuses on profiting by taking many, smaller trades and holding them for relatively short time periods, usually 5-10 trading days at a time, although swing trades may last longer, i.e., for several weeks, depending on the market.

Although swing traders typically seek profits of about 5-10% with each trade, compared to long-term investors who target 20-25% returns on a greater time frame, those smaller profits will be substantial when considered collectively. Four trades with a weekly profit of 5% result in an overall total of 20%.

Additionally, because of the reduced risk for swing traders compared to long-term investors, most losses associated with swing trades will only average 3-4% compared to losses that would have accumulated if you held the stock for longer periods of time, i.e., 7% to 8%.

Swing trading can also help maintain liquidity for a stock that may not be performing well, or to protect yourself against extreme volatility caused by market fluctuations, by taking advantage of shorter holding periods.

Therefore, stockholders may wish to hold on to stocks that have demonstrated early strong performance to potentially benefit from further upside or, conversely, take partial profits to reduce overall market risk exposure.

How Swing Trading Works?

Swing traders use the upward and downward changes that happen within a larger trend cycle to make profits on market swings. Two main strategies follow this practice:

• Trend Trading

Opening and closing positions according to the direction in which the leading stock in the current trend has been heading.

• Counter-Trend Trading

Taking an opposite position to the trend for temporary periods.

The most profitable swing trading stocks in India are those with consistent price movement and high levels of activity.

Key Steps in a Swing Trade

Choose a Stock

Traders will first look at the fundamental analysis of the stocks they want to trade. Traders are more confident that a stock with strong fundamentals is more likely to provide short-term returns than a stock without those fundamentals.

Analyse Technical Charts

After shortlisting stocks, traders study charts such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), volume patterns, and trend lines. These indicators help forecast potential swings. Analysts also track industry trends and news to validate their selections.

Determine Entry and Exit Levels

Many swing traders will wait for price action to move toward a support or resistance level and buy as it approaches support and sell as it approaches resistance. To limit risk in this trading style, swing traders typically use the following mechanisms:

• Stop-loss orders are often set at about 5% below the entry price.

• Profit target levels are usually about 20% above the entry price.

By implementing these controls, swing traders are able to maintain strict trading methodologies and protect against erosion of their capital.

Swing Trading vs Day Trading

Features

Holding Period

• Swing traders: Hold positions for days or weeks.
• Day traders: Open and close positions within minutes or hours, never carrying trades overnight.

Leverage

• Swing traders: Typically use leverage of up to twice the investment.
• Day traders: Generally use up to four times their investment in leverage.

Trading Style and Commitment

• Swing trading: Flexible and suitable for part-time traders who prefer fewer but more calculated trades.
• Day trading: A full-time occupation requiring constant monitoring and immediate decision-making.

Profit Approach

• Swing traders: Focus on a select group of stocks they believe can deliver meaningful returns over short periods.
• Day traders: Accumulate small profits through numerous trades each day.

Which Is More Profitable?

Both day trading and swing trading have profit potential. However, the skill sets differ greatly between the types of traders.

Day Trading: It requires the ability to make fast decisions, be quick to respond, and react to rapid price fluctuations.

Swing trading: This requires more thorough analysis and understanding of the market to identify seasonal opportunities and time frames where price changes will occur.

Experts emphasise that profitability hinges on trader expertise, risk management, and consistency rather than the strategy alone.