What is Swing Trading for Beginners - Strategies, Meaning, Indicators, & How to Do
Stock trading is a game of highs and lows. Despite your research and hard work to maintain a profitable portfolio, anything can go haywire at any moment. To circumvent such situations, seasoned traders use multiple strategies to always be in the green. They do not rely on just a few stocks or go long on every purchase.
One such strategy is swing trading. For many investors, it is an essential part of their portfolio that ensures larger margins in the long term. Let us understand everything about swing trading and how it differs from day trading.
What is Swing Trading?
Instead of focusing on large profits over the weeks or months, swing trading is a strategy that aims to make smaller profits in 5 to 10 days. The best time frame for swing trading can also extend to a few weeks, depending on the market. Usually, traders who hold for a longer duration expect to make 20-25% profits on their stocks. However, the profit goal for swing trade stocks is in the range of 5-10%.
This strategy may seem unappealing if you are used to holding your positions for the long term to make higher profits. However, swing trading strategies allow you to make several small wins that add up to a substantial amount. For instance, 5% profit every week for four weeks could mean the same as 20% over two months. When you include the time value of money, you will realise that the swing strategy can give you better results.
Similar to smaller profits, the losses are also small. For instance, the losses typically in the range of 7-8% over months get reduced to 3-4% over the short term. However, you can also choose to hold stocks that show good initial strength. Or, you can withdraw them partially and hold them for a longer time to make more profits.
As swing trade stocks are bought and sold quickly, you can maintain liquidity and avoid market volatility.
How Does Swing Trading Work?
A swing trader can follow two methods to enter the trade and gain from the market movements. One approach is to follow the trend: to sell or buy as per the primary trend. Another method is to counter the trend, which means selling or buying against the primary trend.
The best stocks for swing trading in India are the ones that have shown a lot of movement or have a high volume in the market.
Here are the steps you can follow for swing trading.
Find a Stock
The first step is to study the fundamentals of a stock before investing in it for swing trading. Your analysis should give you the confidence that your swing trade stocks can give you good returns in the short term.
Analyse the Charts
After you have identified a few stocks for swing trading, the next step is to study their charts to see how it has performed in the past. For this purpose, you can analyse charts like Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), Volume and Trend Lines etc. Apart from this, you can also read articles and industry news to be confident in your trade.
Decide Your Entry
The downward movement of a stock from its resistance level and the upward movement from the support level is called the swing. Swing trading strategies aim to gain from this up-and-down movement. It means buying at the support level and selling at the resistance level.
Now that you know this strategy, you can fix your stop-loss order at 5% below your entry price. Similarly, you can set your profit at 20% above your entry price. It will help keep you on track and minimise your losses.
Swing Trading VS Day Trading
Day trading refers to buying or selling stocks within a day. It could also mean opening and closing the positions within a few seconds. Day traders do not hold their positions overnight. On the other hand, swing trading involves holding the stocks for a few days or weeks.
This difference in pattern and expectation is the major difference between day trading and swing trading. Some other differences are detailed below.
In day trading, the leverage is usually four times the investment. However, the leverage is two times the investment in swing trading. Day traders are full-time traders, and stock trading is their primary source of income. They have to constantly monitor the up and down of the market and make quick decisions about buying and selling to make decent profits. However, swing traders are part-time traders.
Day-traders make multiple daily trades and do not wait to make big profits. They make several trades to make a substantial profit. Swing traders instead select only those stocks that they believe can them huge margins in the long term.
What Gives More Profits: Day Trading or Swing Trading?
Day traders execute a large number of trades in a day. They focus on making bigger profits through these daily trades. However, that does not mean that a swing trader cannot make similar profits.
The skills required for executing both these trades are a tad different. For instance, day traders make fast decisions to make gains or cap losses. On the other hand, a swing trader researches well to identify investment stocks.
A stock investor follows several strategies to make a profitable portfolio. The swing strategy ensures that the investor can make good margins and cap losses by holding stocks for a few days or weeks.
Is there a minimum fund requirement to do swing trading?
There is no minimum requirement for minimum funds for swing trading in India. You can invest even INR 10,000 and go up to INR 50,000. However, you may want to ensure that you have enough liquid funds to buy the stocks in the quantity you deem best.
It is advisable to identify your financial goals before you invest. It will also give you a perspective of the amount you should put into your trades for swing trading.
What is the ideal time to stay invested in the stocks for swing trading?
Depending upon your liquidity requirement and financial goals, you can stay invested from a few days to a few weeks. The experts in swing trading develop the skill after regular practice analyzing price charts along with swing highs and lows. With time, they learn to forecast the price direction accurately.
Swing traders use measures like 50-day, 100-day, and 200-day moving averages (MA). These measures help them to determine the uptrend or downtrend. Swing traders hold their securities for more than one day and close them within three to four weeks.
Can I short-sell?
Short selling requires a trader to borrow stock from a broker and sell it in the market to buy it back in the future at a lower price. When the stock price dips, the trader buys it from the market and sells it to the broker. As swing trading involves buying and selling in a short period, swing traders can short-sell too. Short-selling your stocks can create better profits instead of staying invested for a long time.
What is a good swing trade strategy in a weak market?
When the market is weak, it makes sense to support the resistance. Although the gains might be smaller, you can compound the profits into excellent annual returns when you do it consistently.