This is a guest post by Joshua Ahorro from ByBit. The article is written as an educational article for stocks that is mostly applicable to crypto traders as well.
Swing Trading is a type of major trading where certain positions are held longer than one day. With swing trading, fluctuations in corporate fundamentals typically need several days to a few weeks to create adequate price trends to generate a significant amount of profit. Hence, the majority of fundamentalists prefer swing trading over any other type of trading.
In a nutshell, swing trading places in between two other well-known trading styles, namely trend trading/position trading, and day trading. With day trading, a trader holds a stock between a few seconds to a few hours within a single day only. On the contrary, trend trading requires a trader to evaluate the essential long-term trends of an index or stock. Trend traders hold the stock for a few weeks or even months.
In this article, we highlight everything you need to know so you can have a comprehensive overview of what swing trading is all about.
What Is Swing Trading?
Swing trading is a medium-term trading technique used by traders who try to gain reputable profit from the market’s price trends. That said, swing trading helps traders buy and sell stocks whose indicators direct to a positive (upward) or negative (downward) trend in the future. Swing trading requires traders to hold a specific stock or index for a minimum of two days to a maximum of three weeks. Eventually, they trade the stocks on an intra-week or intra-month basis between positive and negative fluctuations.
Best Stocks For Swing Trading
The primary component for successful swing trading is choosing the right stocks. With swing trading, the best stocks are the large-capacity stocks considered most actively traded stocks on the market’s popular major exchanges. In a dynamic market trend, the stocks will swing between extreme heights; hence, they are swinging in low extremes and high extremes. As a result, the swing trader will take advantage of the trend in one direction for a few days or weeks only and then switch to the opposite edge when the stock reverses its trend or direction.
Pros and Cons of Swing Trading
Before anything else, we’ll describe the pros and cons of swing trading. After reading this, you can evaluate whether swing trading is the perfect trading technique you can start when it comes to stock market trading.
- Swing Trading only requires a few hours of the day, unlike Day Trading.
- It is suitable for part-time trading; hence, you can still work at your full-time job or schooling without compromising them.
- Swing traders rely completely on technical analysis; hence, swing trading has a more simplified process.
- Swing trading offers the opportunity to maximize short-term profit by seizing the bulk of market/price swings.
- Timing in the Stock Market can be challenging.
- Sudden market reversals can yield to major losses.
- Swing traders regularly miss longer-term trends or exceptional stocks over short-term market changes.
- More exposure to weekend and overnight price variations resulting in risks associated with gaps in prices
How Swing Trading Works
Swing trading gains profit through the upward and downward trends or swings in the prices of the market. Swing traders hope to capitalize on small fluctuations within a bigger overall trend. That said, they consistently target to gain a lot of small wins that eventually add up to bigger profits or returns. For instance, other traders will wait four to five months to achieve 25% profit, while swing traders produce 5% gains per week and surpass other traders’ earnings in the long run.
The majority of swing traders utilize daily charts, such as 24 hours or 48 hours, to pick the perfect entry or exit point. However, other swing traders adapt shorter time frame charts, namely hourly or 4-hour charts.
As a newbie trader, starting with swing trading is overwhelming and confusing. Numerous questions can come into your mind, especially if you have zero knowledge about trading in general. In a nutshell, we list down how to get started with swing trading.
- Pick a suitable swing trading platform.
The first step to begin with your swing trading journey is choosing the right swing trading platform. It is crucial for obtaining relevant market data and a platform for executing your trades. With advancements in technology, many trading platforms or trading software platforms are emerging to provide traders with a one-stop-shop for their trading needs.
As an introduction, here are some of the market’s reputable trading platforms:
- Create your trading strategies
Swing trading isn’t a one-size-fits-all type of trading. Hence, you can create so many variations of trading strategies regardless of the trading technique you want to venture into. We’ll discuss more of the swing trading strategies in the next section.
In creating a swing trading strategy, here are some of the steps that you can follow:
- Develop a trading idea by formulating an assumption. With this step, you can observe how the stock market behaves using charts. You can play around to gain an essential overview and insights.
- Read through articles and forums about swing trading. You can implement the concepts you’ve read and customized them according to your preference.
- Perform a test run on the idea you’ve just created.
- If the test you’ve performed yields promising results, you can enhance the performance of the strategy. You can have a trial and error process in improving your technique.
- Now that you’re confident with your swing trading strategy, you can go live with the actual stock market.
Popular Swing Trading Strategies
A variety of swing trading strategies consists of different entry and exit points and technical analysis tools. Here are some of the popular swing trading strategies you can start with:
Sector Trading involves the identification of the strongest market sector. Once you’ve recognized the market sector you prefer, select individual stocks that match your standards. With sector selection, you invest only in the most promising sector in the market.
A breakdown strategy lets the swing trader choose an open position on the earlier side of a downtrend. With a breakdown strategy, you open a position as soon as the price breaks below the support level.
Breakout trading is the opposite of breakdown strategy. With breakout trading, swing traders take an open position on the early side of the uptrend and eventually identify the price to breakout. With a breakout strategy, traders start a position as soon as the price breaks above the key resistance level.
Pairs trading is a type of swing trading where the traders enter positions in two stocks within the same market sector that are often. You can short a certain stock with pairs trading, while going long on the other stock, considering that your trading strategy indicates a correlation is becoming weaker. As a result, you’re hoping to earn from one stock rising while the other is going down.
Also known as pullbacks, retracement trading involves short-term price changes within a larger trend. Retracement swing traders identify the price to temporarily reverse within the standard movement and profit from this short-term fluctuation. Reversals always begin as potential pullbacks; thus, swing traders must identify whether it is purely a pullback or the retracement is an actual relapse.
Reversal trading depends on the fluctuation in price momentum. Reversal strategy targets to earn profit from the trend variations. For instance, when an upward trend drops momentum and the price begins to shift downwards. Depending on the current market trend, the reversal can either be positive (bullish) or negative (bearish).
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Swing trading is one of the perfect trading techniques for beginners to get an overview of what trading looks like in general. However, swing trading still provides advanced and intermediate traders with reputable profit potential.
Also, swing trading is suitable for individuals who can’t commit a whole day to monitor their charts but can set aside a few hours to analyze the stock market every night. It is ideal for those employed in full-time jobs or studying in school but have adequate free time to stay updated with the current trend of the global market or economy.
Like any other type of trading, swing trading has its advantages and disadvantages. Hence, it is entirely up to the traders to become proficient with swing trading or try other trading techniques.