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What Is Swing Trading

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Swing trading is buying low and selling high in a short span of time. Some traders do it Intraday called as day traders and some take position for a few days.

Swing trading combines fundamental and technical analysis in order to find the stocks direction from the current position. Swing traders do not look for only up direction, if they feel the stock may go down they short them. All they are looking for is short momentum.

When they see the stock is not poised to move they do not take the trade. The benefit of swing trading is efficient use of time and money and higher returns. However their are drawbacks as well like high brokerage commission and high losses if their trade goes wrong.

Swing trading can be difficult for the average retail trader who is not equipped with either technical or fundamental knowledge. Some of the good technical indicators are Bollinger Bands, Candlesticks, moving averages, Average True Range – ATR etc.

Using the above indicators a trader finds quickly if a stock has the potential to move up or down. Based on this they are able to take the trade.

Please note that swing trading is not intraday trading, its short-term stock movement trading. It is usually taken for a few days with proper stop loss. Of course it is better to hedge a position. I personally do not recommend trading without a hedge. The only trade that you should take without a hedge is equity cash buy-hold-sell. By the way equity cash buy-hold-sell is not trading, its investing even if its taken for one second or many years.

Benefit of awing trading is that you do not have to follow trend. Swing trading is to find out short term moves which are independent of the trend. For example a stock may be going down for 2-3 months, but a good swing trader will find out the short term support and buy the stock for short term. When the stock bounces back, the swing trader benefits and exits the stock.

Most swing traders hold the stock overnight or a few weeks, rarely it goes beyond 30 days. To minimize risk position size is very important. The risk word is very important here. For example if the trader is 60% sure the trade will go through, they may increase the lot size compared to a trade where they are 50% sure. This is pure professional trading.

What is the philosophy of Swing Trading:

Every stock goes through four stages of movement:

1. Base Stage – Trending and moving in almost straight line – here both buyers and sellers are same so stock does not move much.

2. Advancing Stage – Some good news has come in, or the company performance is better then market expectation. Now the stock goes into second stage – it starts to move up. Swing trader buys the stock in this stage.

3. The Top Stage – After an up-move buyers starts to decline and the stock surge stops. This is knows an topping out. Here the stock will decline some and rise some giving a head and shoulders pattern. This is signal that the stock will fall. Here is where the swing trader will sell and book profit in the stock.

4. The Falling Stage – Sellers increase and the stock falls and goes into a downtrend.

See this image you will understand the different stages of a swing:

Explanation:

After the consolidation (Stage 1) – the breakout starts (Stage 2), this is where the Swing Trader enters the position. This can be anywhere from the rising trend. Good Swing traders do not get caught at the tops. Stage 2 is where most good swing traders enter when the uptrend is confirmed.

How Is the Uptrend Confirmed?

When a stock is in an uptrend its close will be above the previous close with increased volume day by day. If this happens for a few days then the trend is confirmed. This is the place where a swing trader enters.

How Is the Downtrend Confirmed?

Its exact opposite of uptrend. The stock will close below the previous close for a few days and the volume will also decrease. This is the time for a swing trader to exit and take out profits.

Do not forget that this cycle is will repeat.

Experienced swing traders keep on radar 4 or 5 stocks only as it becomes difficult to keep a watch on more than 10 stocks.

Within three months they become well aware of the average volume in the stock, support and resistant levels of the stock. After six months the stock makes a new support and resistant levels.

Please note that its very rare that swing traders enter Stage 2 at the best point and exit at Stage 3 at the best point – but its about making profits. They have a target in mind and if that is achieved they exit the stock.

Are you a swing trader? What are the problems you face?


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About the author: I started trading stock markets since 2007. However my first 3 years were losses. Then I dedicated almost 1 year on studying, researching, paper trading options and learned a lot in that time. Since 2011 I am trading Nifty options profitably. Call me if you need any help trading options on 9051143004.

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