Swing Trading: A Guide On How Swing Trading Works and How It Relates To Other Trading Options

When an individual decides to venture into the stock exchange market, one has to make a vital step in identifying the most suitable trading style they can use. Every trader should practice a trading style that best suits them. Trying to imitate other online traders' trading styles can be unfavorable to your own stock exchange market. This article dives into the most practiced and highly convenient trading style known as Swing Trading.

What is Swing Trading?


Swing trading is an effective trading technique that is highly used to buy stocks when indicators point to positive (upward) or negative (downward) trends in the foreseeable future. This trend can range from overnight to a few weeks. The ultimate aim of a swing trade is to capitalize on buying and to sell the interim lows and highs within a wider overall trend.

In order to capture short-to-medium-term gains in stock for less than a month, it is best preferred that investors should embrace the Swing Trading style. Swing traders tend to primarily use technical analysis in the search for more trading opportunities. Fundamental analysis is also normally utilized by Swing traders majorly to analyze price patterns and trends.

Key facts on Swing Trading

· There is a possibility that a Swing trader can take losses or profits depending on the price action movements or the technical indicator or choose to take profits that are meant to utilize an established risk or still take the reward ratio based on the profit target and any stop-loss that arise.

· The Swing Trading style gives the trader exposure to weekend and overnight risk. This is where the price normally gaps and opens the next session at a varying price.

· Keep in mind that Swing Trading is mostly all about taking those few days or months with the core target of profiting from the projected price move.

· Swing trading serves as one of the most popular types of active trading. This form of active trading involves the search for intermediate-term opportunities by traders by involving several forms of technical analysis.

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How Swing Trading Works

For more than a single trading session, an investor can hold a short or long position. The period does not surpass several weeks or rather a couple of months. The stipulated time is the general estimated period since sometimes other trades can hold a position beyond a couple of months and still be termed Swing trades.

Swing traders normally use technical indicators in the intention to determine whether certain stocks have got momentum and stipulate the best time to buy or sell. For the laid opportunities towards the favor of the trader, quick actions are paramount to increase the possibilities of making profits in a very short period.

Swing trading mainly focuses on capturing possible price moves. As much as some traders may prefer sedate stocks, others may decide to search for volatile stocks that feature lots of movement. Both ways are harmonious since swing trading is purely a process of tracking and predicting the price movement of an asset, then assuming a position and finally capturing a chunk of the attained profit in case that move materializes.

For one to be a productive swing trader, one has to effectively consider capturing a chunk of the unexpected price move and the move on to another expected opportunity. Let us have a quick glance at a real-world example of any swing trader who may determine the best time to buy or sell by taking an accurate analysis of Amazon's stock.

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Swing Trading Techniques

Among the multi-day chart patterns that swing traders use in predicting the market trends, there are the average crossovers, cup–and–handle patterns, flags, head and shoulders patterns, and triangles. These are the most common patterns that swing traders tend to look for.

The swing traders can also use the key reversal candlesticks supplementary to other indicators to come up with a solid trading strategy.

Successful swing traders have to devise a satisfactory plan and strategy on how to gain the ultimate edge over many trades in the stock market. They have to search for trade setups that seem to lead to lead to predictable movements in asset prices. This approach is not as easy as it may sound since there is no strategy that succeeds every time.

The more favorable the risk/reward of any trading strategy, the fewer chances of winning so that it can produce an overall profit over several trades.

Swing trade in Amazon


If you take a keen observation on the chart above, you will notice the “cup and handle” consolidation pattern. The cup is u-shaped, and the handle points a bit downwards, and this pattern is referred to as a bullish signal.

For instance, a swing trader wants to make consistent profits; they would be needed to purchase the stock at the top of the “cup” at or above the latest high of $3,555. The trader is required to place a stop-loss order at the latest low in the cup handle-$3,395. This means that the maximum loss on the trade will be $160 ($3,555 - $3,395 = $160).

Additionally, a trader will be required to sell at $480 (3 x $160 = $480) that is above the entry price, at the recommended reward/risk ratio of 3:1. The trader still can sell at $4,035 ($3,555 + $480) and attain huge profits.

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Comparison between Day Trading and Swing Trading

The holding time for positions is the main distinction between the two trading styles. As day trading positions are limited to a single day before which the markets are closed, the swing trading holds for several days or weeks. Swing trading requires less time for the trader when compared to day trading.

The swing trader takes the financial responsibility of incurring the unpredictability of the overnight risk that includes gaps up or down against the position. Once the swing traders take an overnight risk, they at the end get to do smaller position size compared to day trading, taking the assumption that both the traders possess similar sized accounts

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Types of securities that are best suited for swing trading

As much as a swing trader can enjoy feat in any number of securities, the best candidate is most likely to be large-cap stocks, one of the most frequently traded stocks on the major exchanges.

The stocks will often swing between broadly defined high and low points in an active market. Here, the swing trader will ride that wave in a single path for some days or weeks and then switch to the other side of the trade when the stock reverses its direction.

Swing Trading Concepts

Before we look at the pros of practicing the swing trading concept and later on its cons, there are certain characteristics that are perceived in the long run of using this type of trading style. A swing trader has to assess their trades on a risk/reward basis by doing a quick analysis on the asset chart. By so doing, the trader will be able to determine where they will enter and where to exactly place a stop loss and, in the end, be in the best position to get a profit.

Take a quick example of a trader who decides to risk $1 for every share that is on a setup; there is a chance of gaining $3. This is termed a favorable risk/reward ratio. A wise swing trader will not trade $1 for a $0.75 gain since it is quite unfavorable.

Primarily, the reason why most swing traders use technical analysis is due to the short-term nature of this type of trades. There must be a thorough search for opportunities on the daily charts, and a trader has to keenly watch one hour or 15-minute charts so as to get an accurate entry, stop loss, and take-profit levels.

Advantages of Swing Trading

Swing trading,

· needs less time to trade as compared to day trading

· Allows traders to maximize short-term profit potential by capturing the bulk experienced in the market swings.

· Has the exclusive reliability on the technical analysis a trader requires in simplifying the overall trading process.

Disadvantages

Swing trading seems to be the best option for an online trader, but it features certain unfavorable turns.

· Trade positions can possibly be subjected to overnight and weekend market risk

· Mostly swing traders miss longer-term trends in favor of the short term market moves

· There can be experienced sudden market reversals that can lead to substantial losses.

Bottom Line

Swing selling is a practice that most traders embrace purposely for continuous profits in stock trading. This trading style gives you the grand opportunity to get into the holding of the short-time positions for up to several weeks. However, the small gains achieved can be highly substantial over time.