What is Swing Trading?
Swing trading is a kind of trading where a traders tries to take advantage of short duration yet big movement of stocks. Duration of swing trading can be as low as 2 days to 7 days. Swing trading can be played both in direction or against current trend.
What is the best setup for swing trading?
Swing trading works best in case of mild trending market. The possibility of stock to change current direction is highest here. Please remember that when stock is in strong uptrend then chance of swing trading against current trend may give more losses than profit and playing in direction of trend will give less yield than trend trading.
In a sideways market in narrow range, swing trading may not have good risk reward ratio. In highly volatile period swing trading may hit many stoploss.
How to identify a right swing trading scenario?
Generally, stock don't move from their lows to high in linear fashion. They do so by going through various short term correction. Swing traders tries to encash these counter trend movement to trade.
With Technical Analysis one can anticipate possible beginning of counter trend and can encash such movement.
Traders depending on the comfort with indicators like MACD, RSI, Bollinger Band, Volume, Trend, Candlesticks, Moving Averages etc., may use them to identify trend reversal and play in that direction.
Playing near important support and resistance will give better results. Some of the important ones (of-course not exhaustive list) are:
a. 200 day simple moving average.
b. Fibonacci retracement level.
c. Rising RSI from ovrsold level.
d. Breach of trendline with atleast three points.
e. Bullish Engulfing/Piercing with good volume etc.
Imp: A break out in the direction of trend after consolidation with huge volume can be a good entry point for swing trading.
A safer strategy is to play buy on dip for strong uptrend stocks. Make sure Risk/Reward ratio is greater than 2:1. Always play with stop loss and never change stop loss.
Advantages of Swing trading
1. Quick return from investment. Swing traders can get 3 to 15% return in a week.
2. Swing traders do not need to study about fundamentals of the company.
3. Swing trading can be played for both uptrend and downtrend.
4. Part timer (those who cannot sit in front of trading terminals) can use this strategy to earn quick bucks with looking at day to day movement of the stock.
Disadvantages of Swing Trading
Generally, stop loss in swing trading is closer than trend trading so any volatile session can hit many stop losses.
In Trending market, swing traders tends to make less profit as they quit as soon as their target is achieved.
Please note that swing trading is not an easy game. Lots of knowledge and experience is required to earn consistently. Newer traders are advised to place a small portion
of their capital for swing trading and are also advised to do a lot of paper trading before putting money for swing trading.