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Swing Trading – What is it, Risks, Benefits, FAQs

  • Akshatha Sajumon
  • 03 Feb
  • 6 minutes

If stock trading interests you and you have started exploring it, you may also want to familiarise yourself with the concept of Swing trading. Being a popular trading style, swing trading involves traders relying on technical analysis for their trade decisions. The idea is to fetch decent returns by adopting an unconventional route.

Here, we will explore the concept of swing trading in detail and explain how it works, along with some of the benefits and risks involved.

What is swing trading?

Swing trading aims to generate profits from medium-term price movements or swings. Stock prices often move in waves or so-called swings and the trend could be upwards, downwards, or sideways. With swing trading, traders aim to trade as per up and down price swings within a daily time frame. These swings can last a few days or even a few weeks, sometimes going up to several weeks.

The idea of swing trading is to benefit from individual price swings rather than relying on long-term trends. Swing traders primarily form their trading decisions based on technical analysis, with very little to zero input from fundamental analysis. This strategy often involves chart analysis for predicting the end of one swing and the start of an opposite swing. Usually, trades enter at the beginning of a fresh swing and come out before the start of an opposite.

How does Swing trading work?

Different traders follow different swing trading techniques for their trades in order to maximize profits. Here are a few important steps that can result in successful swing trading:

1.Identifying tradable stocks

A swing trader would first identify a stock or security, the price charts of which show a trend of upswings and downswings. This can be done with the help of a stock tracker. This can help in following the market to further identify stocks that are actively traded and follow a certain price movement pattern.

2.Choosing a price chart

Swing traders usually rely on price charts of a relatively shorter period, ranging between a few weeks to a few months. The time period selected depends on when the security has a visible price movement pattern.

3.Technical analysis

For analysing different price trends, traders mostly use technical analysis tools. The idea behind using technical analysis is to look for profitable opportunities to generate buy and sell indications. 

4.Risk measurement

As per individual risk appetite, traders may place the stop loss signal at a pre-defined level. This is meant for situations when the price of a stock begins to drop. After it drops beyond a certain point, the swing trader can close the trade and minimise losses. Thus, even if the trade turns into a loss, it can be capped or limited to an acceptable limit.

Recommended read – How does a stock market work?

Day trading vs swing trading 

Swing trading and day trading may seem similar, however, there is a key difference between the two. This difference is ‘time’. The two strategies involve different time frames for holding a trade. Day traders make transactions within a few minutes or hours. Swing trading is done over a few days or weeks. Because of shorter time frames, day traders mostly do not hold positions overnight. Swing traders, however, take into account that a stock’s opening price could dramatically move away from its closing price the previous day.

How is swing trading beneficial?

Some of the key benefits that can be availed from swing trading are:

  • Investors who use swing trading appropriately may fetch comparatively higher returns in the short or medium term. As compared to conventional trading techniques, swing trading can prove more beneficial in the short term.
  • Unlike intraday trading, this form of trading does not require constant monitoring, as the holding period is relatively long. Therefore, it allows more time on hand for traders, which can be used for focusing on other parallel investment strategies.
  • Swing trading does not require searching and picking profitable stocks. The idea here is to use technical analysis for investing in stocks and remaining invested in them for a few days or even weeks. 

Additional read – How to calculate closing stock price?

Important factors to note about swing trading:

Mentioned here are a few of the important factors that investors should know before investing through swing trading:

  •  Relies more on technical analysis :Since swing trading involves a technical analysis of stocks, it may require investors to spend substantial time in designing the technical charts and indicators when starting off. Only when these are used effectively will a trader be able to generate profits over time. 
  • Higher risk involved : Despite the knowledge element required in swing trading, there are often higher risks involved. Even if one uses the best of techniques, stock markets are unpredictable and may result in losses at times. Using stop-loss concept in swing trading can help in limiting the losses due to movements within a short span. 
  • May not be suitable for beginner investors : This concept may not be suitable for new investors who may be starting off with basics of stock markets. It is best to have sufficient knowledge of the markets and trading before venturing into swing trading.

Conclusion

Swing trading can offer numerous opportunities to investors due to price movements resulting from short-term volatilities. With the help of technical analysis, investors can make the right investment decisions to make the most of price fluctuations. In the end, stock market success is about observing, learning, and implementing the right techniques to maximise gains.

FAQs

  1. How much money do you need for swing trading in India?
    There is no minimum requirement for starting swing trading in India. Irrespective of whether one trades with Rs. 50,000 or Rs. 5 lakhs, the capital should be sufficient to cover prices of selected stocks.
  1. Which time frame is best for swing trading?
    Swing traders often work in an investment timeline of a few days or weeks depending on personal preference and investment objective.
  1. Are there any rules to follow in swing trading?
    Some of the common thumb rules that swing traders follow include going by the market directions, identifying stocks that are outperforming the index, investing in liquid stocks, etc.
  1. Do swing traders short sell?
    Yes, short selling is often used by swing traders since it can generate profits faster as compared to going long.
  1. Are there any automated tools available for swing trading?
    There are many online softwares and pre-loaded tools that can be used for swing trading. 
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Akshatha Sajumon