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Read how swing trading is done and types of swing traders.
What is Swing Trading
A lot of people get confused when they are told about Swing Trading. Lot of them assume that Swing Trading is same as Day or Intraday Trading.
Most of the positional naked traders especially Future traders are swing traders. It is important to note that they themselves do not know that they are Swing Traders.
In technical terms even day traders are Swing Traders, but Intraday trading is based purely on small moves so it cannot fall under proper Swing Trading.
Traders do know that for every fall in a stock there is a support and for every rise there is a resistance.
Swing Traders try to capture and benefit from the stock’s or any financial instrument like Options and Futures, movement especially support and resistance.
It is a different story that most Swing Traders end up in huge losses, so hedging is highly recommended.
How Swing Traders Get The Support and Resistance of a Stock?
Novice Swing Traders speculate the movement of a stock and initiate a swing trade by buying or selling a future, and they lose heavily.
Experienced traders study Technical Analysis to look for stocks with huge volatility or short term momentum.
Swing Traders come into action during the results season. As soon as quarterly result of a stock is announced they find the support and resistance of a stock and take entry of a trade.
How Many Types of Swing Traders Are There?
There are two types of Swing Traders:
1. Short Term Swing Traders.
2. Long Term Swing Traders.
Short Term Swing Traders are those who trade in derivatives like options and futures and hold the position till expiry only. Which means it may be one day till expiry day.
Long Term Swing Traders usually do not trade in derivatives. They buy stock in cash when they see support and hold for the long term. This may be from one month to many months. Warren Buffet is the world’s best Long Term Swing Trader. He buys a stock when he sees a strong Economy MOAT, and sells when it loses its MOAT.
What is “Economic Moat”?
Economic moat is the competitive advantage that one company has over other companies in the same industry; this term was coined by Warren Buffett, a renowned investor and executive at Berkshire Hathaway. The wider the moat, the larger and more sustainable the competitive advantage of a firm. By having a well-known brand name, pricing power and a large portion of market demand, a company with a wide moat possesses characteristics that act as barriers against other companies wanting to enter into the industry.
Economic moat describes a company’s competitive advantage derived as a result of various business tactics that allow it to earn above-average profits for a sustainable period of time. Companies that obtain defensible competitive advantage from patents, cutting-edge technologies and other cost advantages can have a wide economic moat that curbs competition within their industry. Also, firms that enjoy strong economic moat tend to demonstrate solid financial performance and rising returns on capital over time. The most common sources of economic moat are cost advantages, switching costs, efficient scale, intangible assets and network effects.
Who Are Swing Traders?
Mainly retail traders who are Swing Traders. Large financial institutions do not do Swing Trading as a lot of money of their clients is at stake. One big bad trade may wipe out a huge portion of wealth from a single trade. They fear that. Even if they want to do Swing Trading they do it only on a portion of their cash like 10% or less and hedge it to protect unlimited loses.
My course can help retail traders like you learn proper hedging methods to protect huge losses. Even small retail traders sometimes take wrong trade and keep it in the hope that markets will reverse direction and they will make a profit. It does not happen and one day they exit with a huge loss. Therefore it is highly recommended that you learn hedging methods and non-directional trading strategies where there is no need to find direction and still you can make a profit without bothering about where Nifty is heading the next day.
Time Involved in Swing Trading
Too much time is involved in Swing Trading. The trader has to keep monitoring the trade as long as the markets are open. Institutional traders do not like too much monitoring as they have other jobs like fundamental analysis to buy stocks for the long term, cash allocation, client management etc. Therefore only a small portion of cash is allocated to Swing Trading. The team which does Swing trading is different than the team doing fundamental analysis to buy stocks for the long term. Institutional traders mostly buy stocks of good companies for the long term swing trading. Only a small portion goes into short term swing trading.
Another reason why large institutions cannot do swing trading with all the capital is that large institutions have too much cash so they are bound to trade only in stocks that are highly liquid. If there is less liquidity their trade may not be completed. Therefore they buy-hold-sell stocks for long term, only a small portion goes into derivative swing trading. Some institutional traders do not do swing trading at all.
However most retail traders whether Intraday or day traders do swing trading and suffer huge losses as they are not able to:
1. Find the support and resistance, and,
2. Do not hedge their positions.
How Long Swing Traders Hold Positions?
Day traders do not hold positions overnight. They are very short term swing traders.
Positional traders may hold positions overnight or until expiry day, but usually these traders are looking for bigger profits so they do not clear the trade the same day. Most of the positional traders try to make 5% return from every trade.
For positional swing trading the risk is more. It is therefore very important that careful position sizing is done. If you are a swing trader please allocate only a small portion of your cash in large big swing trading else a huge portion of your trading money may get wiped out in one bad trade.
How Experienced Positional Swing Traders Calculate Support & Resistance Levels Of A Stock?
Experienced positional swing traders do calculate both fundamental analysis and technical analysis to arrive at the support and resistance level of a stock or Indices before taking a trade. These may include larger time frame charts including the 15-minute, 60-minute, daily and weekly charts. This is done because positional swing traders need more holding time to capture the price move of 5% or more.
Highly experienced positional swing traders look for multi-day chart patterns like moving average crossovers, cup-and-handle patterns, head and shoulders patterns, flags, triangles, key reversal candlesticks, such as hammers for reversal bottoms and shooting stars for reversal price tops. These help them to make a strong game plan. They are willing to give the stock space to move to capture the profits therefore their stop loses are big like 8-10% of the move, however profit taking also increases to 10-12%. As a big move cannot come in a day or two, these positions are held overnight to any day until expiry if the trade was taken in options or futures. But if the trade was taken in stock cash then they may hold for months.
What Is The Problem Of Derivatives Swing Traders?
Derivatives swing traders, short or long have a huge problem – it is the stop loss. Swing options and futures traders face a huge problem in taking a stop loss. Supposing their stop loss is 5% but the next day the stock gaps down 10%, they are forced to take a stop loss at 10%. This one loss takes them down by 2 profitable trades. This is the reason my emphasis is on hedging. If they hedged their positions properly it would have saved them from this huge loss and restricted it to may be 2% or less which is half of a profitable trade. Next trade if profitable they are in profit even after taking loss in the earlier trade.
With Intraday day traders too the story is the same. It is not uncommon for a stock to suddenly fall down 5%, then the day traders take a loss. If this was properly hedged, the losses would have been significantly reduced. It is also seen that position size of day traders is much more than positional traders as Intraday traders leverage their positions heavily by getting that extra Intraday trading margin. Positional traders do not get a such big leverage, so are forced to reduce position sizing.
Taking extra leverage is greed which sucks Intraday traders into betting big and losing big.
Are you a swing trader? If yes what problems you are facing?
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Dilip Shaw, Founder
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