Understanding Swing Trading

Learn about swing trading in the stock market and how it can help you fulfil your investment goals.

Understanding Swing Trading


As an investor, you might approach the stock market with various goals. Some of these goals might be short-term, and some might be long-term. Which objectives would you prioritise when you trade in the market?

Suppose, you want to buy a car worth ₹7 lakhs in the coming two years. You currently have ₹5 lakhs in savings, and you can take a loan for the remaining amount to buy the car. Or, you can always invest the amount of ₹5 lakhs in the stock market selecting stocks that are performing well in the short term. This way you can easily expect the investment amount to grow by one lakh considering the returns on the stock are as per the expected returns.

If you choose to invest in the market in the above case, you do not have to take a loan and you save money from the interest payments. You have the option to reinvest the amount and book profits from the same.

Let us take a look at one such technique that can help you fulfil your investment goals.

What Is Swing Trading?

Swing trading is where the investors buy a stock and hold on to it for a period of time. This is called the holding period.

The holding period for a stock in the case of swing trading is short. Generally, a swing trader holds the stock between a few days to a few weeks.

Technical and pattern analysis is the tool that is often used to select a stock and perform trades. The analysis of stocks gives you an insight into when to buy the stock and when to go short on the stock.

Let us take an example to understand better

Suppose you buy 1000 shares of Infosys Ltd at ₹1561, you want to book profits quickly and you resort to swing trading. If a month from now, the stock price goes up to ₹1651, you can earn a profit of ₹90,000.

You got a hang of swing trading in the above example, you can now reason why to choose swing trading.

Why Should You Choose The Swing Trading Strategy?

As you can infer from the above example, the swing trading strategy is the sweet and comfortable spot between day training and trading for investing. You can reap maximum benefits out of investing for a short-term period yet not choosing to scalp like in intraday.

  • Time frame

Swing trading helps you to revise your trading strategy if you find that a particular strategy is not working for the trade. This is feasible because of the time frame allowed during swing trading.

  • Risk Control

Risk control is another reason why swing trading is a good alternative as it helps you to use technical indicators and set limits for the losses.

  • No continuous monitoring

In the case of swing trading, you do not need to sit for hours to identify a trend and keep a tab of the same. While you can have a few dedicated hours, identifying a trend and making a trade for the swing trading stocks would be a brief affair.

Looking at the reasons to choose swing trading, let us understand the working of a swing trade.

How Does A Swing Trade Work?

The swing trade works to tap profits from the upward and downward oscillations of the stock price. These oscillations are called swings. As a trader, you can capture small moves from the larger trend for a stock.

The objective of a swing trade is to make small profits that add up to a significant return within a time frame. You need to use daily charts to decide the entry and exit points for a trade.

As a swing trader, you can ignore the clutter of the intraday trades and focus on a comparatively bigger picture.

Swing trading needs you to use many technical indicators and glance at the fundamentals of the stock as well.

Advantages Of Swing Trading

  • Lesser monitoring - Swing trading has a preset purview and hence continuous monitoring is not mandatory. Swing trades require less time to execute and are comparatively easy to trade.
  • Short-term profits - You can earn short-term profits by investing in the bulk swings of the markets. Notable profits can be booked if the market goes uptrend.
  • Flexible Trading - One of the pivotal edges of swing trading is that you are not forced to sell the stock and square off the position on the same day. You can avoid selling the stock at loss.
  • Setting financial goals - Swing trading allows you to invest your savings in the market for a short period and then remove the invested amount along with the profits.

Can Something Go Wrong With Swing Trading?

  • False signals - A cumulation of false signals in the short term might lead to losses.
  • Early Exit - Sometimes when you exit early from a trade, you can miss out on a greater gain in the long run of the investment tenure.
  • Overnight risk - When you hold on to stocks purchased from the market, there is always an overnight risk attached to it. The market sentiment can affect the pricing of stocks and can disrupt the investment objective.

How Is A Swing Trade Executed In Bullish And Bearish Markets?

Swing trading would not affect your expected gains and profits provided the markets are bullish and the stocks are performing well.

When the market hits a low and is on a bearish sentiment, that is when swing trading strategies can get disrupted. Some of the points below can help you maximise the chances of a successful swing trade.

  • Short-selling the stock. This strategy might not necessarily be suitable for all.
  • Restrict the trading criteria
  • Staying in cash for the trade
  • Trading smaller positions

What Are The Different Tactics Used In Swing Trading?

Swing trading is named so because it involves booking profits due to oscillations or swings. As an investor, you would be required to base your decisions on market trends and fundamental and technical analysis.

You can keep a close watch on multi-day charts and emerging patterns. Some of the popular patterns are:

  • Head and shoulders pattern
  • Flag patterns
  • Cup and Handle patterns
  • Triangle patterns

Understanding ‘Trend’

You must have come across the phrase trend in the market. What does it mean?

Trend trading can be explained as a strategy used for marketing that helps to identify the asset's momentum in a specific direction. When asset or stock prices are on a continuous rise, it is called an upward trend. Similarly,  when the prices go down it forms a downtrend.

You can see the trends and can use them to forecast the stock movement. For example, when there is an upward movement, you can take a long position to benefit greatly from the increase in the stock price.

Understanding Relative Strength Index or RSI

Traders often use the term Relative Strength Index (RSI). What does it mean?

This is a special indicator that helps to identify if the market is overbought or oversold. It is often referred to as a momentum indicator and evaluates the market by measuring the magnitude of price change.

RSI is one of the most widely used indicators in swing trading. It aids in finding the breakouts for a particular stock as well.

Swing Trading Strategies

Let us now take a look at two of the most used and simple trading strategies for swing trading.

  • Fibonacci Retracement - When you start trading, you will observe that stock prices tend to retrace at different levels before reversing up again. The lines drawn on these levels are retracement lines and are called Fibonacci retracement. It is one of the best indicators for swing trading.  These lines help to determine the support and resistance levels for a stock.

You can use these lines to predict the downward or upward movement of stocks and position a stop loss or target order.

  • Simple Moving Averages - This is another popular method used in trading stocks. The simple moving average line continuously updates the data points to represent the average price of an asset. These lines are used to predict the uptrend and sell signals in the market. The 10 and 20 averages are used to draw this line.

For example, if the two lines are placed against each other on the trading chart, if the smaller average line crosses the longer one, then it signals an uptrend in the market.

How Do You Pick The Right Stock For Swing Trading?

When you select the stocks for your setup, here some tips for swing trading you can follow are -

  • Always follow the chart patterns and get a detailed insight into the stock.
  • You should evaluate the economic factors for the stock as well as the company.
  • Penny stocks should be avoided as the risk associated with them is very high.
  • Refer to the earning calendars of stocks. This can help monitor any sudden price changes in stocks.

Parting thoughts

Swing trading is a great way to invest in the market if you have the knack for reading charts, and patterns and following them thoroughly. Various tools are used in trading which help you make a decision for buying a stock or selling it and getting maximum returns from the strategy.

If you are someone who loves data and analysis, swing trading is one great strategy for you. Happy investing!

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