Swing Trading Explained
Swing trading is a trading method used to capture short-medium term movement in a stock in which the span of trade varies from a few days to several weeks.
Swing trading uses market sentiment and technical analysis mainly to predict market movement over the course of trade. Fundamental analysis also plays a role in selecting the stocks to trade.
So in a Swing Trade, there are 4 main regions:
- Trade identification — It is done using technical analysis and market sentiments mainly.
- Entry Point — Entering the trade when certain conditions are met according to the trading rules or strategies.
- Holding period — During this period, the stock is allowed to gain the expected levels. In this period, it is important to maintain a stop-loss (maximum loss one can handle).
- Exit point — When the stock achieves the desired output, you should exit from the trade. This is done due to 2 reasons — Either the trade went wrong, and you have to realize loss according to your stop-loss, or your expected levels are achieved.
Indicators that help in Swing Trading
Swing traders will use tools like moving averages overlaid on daily or weekly candlestick charts, momentum indicators, price range tools, and measures of market sentiment. Swing traders are also on the lookout for technical patterns like the head-and-shoulders and cup-and-handle.
- Moving averages are usually used to confirm trends instead of predicting them.
- Volume indicator is an essential tool for swing traders as it provides insight into the strength of a new trend. The principle here is straightforward: a trend with high volume will be stronger than one with weak volume. With more traders buying or selling, there’s a better basis for the price action.
- Relative Strength Index (RSI) measures the number and size of a market’s positive and negative closes over a set number of periods. Anything over 70 is generally thought to be overbought, which can be a sign to open a short position. When the RSI drops beneath 30, meanwhile, it’s generally thought to be in oversold territory. This is often taken as a sign to go long.
Swing trading can play long or short positions. While any long or short exposure in the market can bear risk, a short position tends to carry much more potential risk due to the possibility of a short-squeeze.
Overnight swing short positions must be monitored more carefully since these require the use of margin to borrow shares. The potential of loss is technically unlimited.
The market is supreme; never believe 100% in indicators; they can help you increase your probability of success but are never fully correct, so do not blindly follow indicators.