Typically, swing trading involves holding a position either long or short for more than one trading session, but usually not longer than several weeks or a couple of months. This is a general time frame, as some trades may last longer than a couple of months, yet the trader may still consider them swing trades. Swing trades can also occur during a trading session, though this is a rare outcome that is brought about by extremely volatile conditions.
The goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an asset’s price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes.
Identifying swing trading opportunities relies heavily on technical analysis techniques. One of the fundamental tools in a swing trader's arsenal is chart analysis, where patterns and trends are studied to anticipate future price movements. Chart patterns such as head and shoulders, double tops and bottoms, triangles, and flags can signal potential swing trading opportunities. We'll talk more about these later.
Another aspect of technical analysis for swing trading is the use of indicators. These mathematical calculations applied to price and volume data help traders gauge the strength and direction of a trend. Popular indicators among swing traders include moving averages, relative strength index (RSI), stochastic oscillators, and moving average convergence/divergence (MACD). For example, a swing trader may enter into a position when a stock's MACD hits a certain target, then the trader will sell that position if the MACD hits a different target.
Finally, support and resistance levels play a role in identifying swing trading opportunities. Support represents a price level where buying interest is strong enough to prevent the price from declining further, while resistance is a level where selling interest is strong enough to prevent the price from rising further. Swing traders often look for price to bounce off support or break through resistance as confirmation of a potential trade setup.
Many swing traders assess trades on a risk/reward basis. By analyzing the chart of an asset, they determine where they will enter, where they will place a stop-loss order, and then anticipate where they can get out with a profit. If they are risking ₹100 per share on a setup that could reasonably produce a ₹300 gain, that is a favorable risk/reward ratio. On the other hand, risking ₹100 only to make it isn’t quite as favorable.
Swing traders primarily use technical analysis, due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. For example, if a swing trader sees a bullish setup in a stock, they may want to verify that the fundamentals of the asset look favorable or are improving.
Swing traders will often look for opportunities on the daily charts and may watch one-hour or 15-minute charts to find the precise entry, stop-loss, and take-profit levels.
KEY TAKEAWAY
"Swing trading is about capturing the intermediate-term trends in the market and riding them to maximize gains."
The distinction between swing trading and day trading is usually the holding time for positions. Swing trading often involves at least an overnight hold, whereas day traders close out positions before the market closes. To generalize, day trading positions are limited to a single day, while swing trading involves holding for several days to weeks.
By holding overnight, the swing trader incurs the unpredictability of overnight risks, such as gaps up or down against the position. By taking on the overnight risk, swing trades are usually made with a smaller position size compared to day trading (assuming the two traders have similarly sized accounts). Day traders typically utilize larger position sizes and may use a day trading margin of 25%.12
Large-cap stocks make suitable swing trading candidates, as they often oscillate in well-established, predictable ranges that frequently provide long and short trading opportunities.
Swing trading offers advantages such as maximizing short-term profit potential, minimal time commitment, and flexibility of capital management. Key disadvantages include being subject to overnight and weekend market risk, along with missing longer-term trending price moves.