What is swing trading?

In the world of finance where everyone wants big returns without investing too much time, it’s hardly a surprise that there’s an entire trading strategy aimed at doing just that.

Swing trading is a game of intricacies, quick decisions, and of course, possibly big rewards. At its core, swing trading takes advantage of short-term to medium-term price fluctuations in the market.

While it does offer something without taking much, it’s not everyone’s cup of tea and is far from being a one-size-fits-all endeavour. Swing trading takes time, effort, and experience to master.

In this article, we’re going to delve into swing trading, explore what it is, how the strategies work, and whether you can actually make money from it. Whether you’re a beginner trader looking to learn new things or a professional looking to brush up on your skills, this article has something for everyone.

What is swing trading?

Swing trading uses technical analysis (and sometimes fundamental analysis) to profit from short to medium-term price movements. This means that swing traders only pick stocks that they predict will show significant appreciation or dips in the next few weeks.

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Traders lose money if they invest more than they can afford.

How does it work?

Swing trading involves entering either a long or short position typically for a few weeks or a couple of months. While this is the general time frame for such trades, some may last more in exceptional circumstances.

The objective of a swing trade is not to wait necessarily for this time period to see profits. Rather, it is to capture and profit from a bulk price movement in a stock no matter when it occurs.

This could be done in two ways – either by taking multiple trades in volatile stocks that move a lot during the time frame, or secondly, by identifying a significant movement well in advance, entering the position, and hoping that the move materialises.

Most swing experts advise traders not to stay invested in a position for too long hoping to capture the entire movement. Since it is very hard to accurately time the market, it is a good practice to use stop losses appropriately and have return goals to make sure you’re not getting greedy.

Picking the right stocks to swing trade

Just like with any other trading strategy, the first step is to pick the right stocks. There are mainly two metrics that experts consider when picking a stock to swing trade: volatility and liquidity. 

• Volatility is how much the stock price fluctuates in a given time period. While excess volatility does no one any good, a stable stock will not provide swing opportunities. Stocks that are moderately volatile are ideal for swing trading purposes.
  
• Liquidity is how easily you can sell or buy a stock at a given price in the market. Liquidity is important to make sure you’re entering and exiting the position at the right prices. If your orders don’t get filled at the right time, you could be losing money.

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Considering the above criteria, large-cap stocks are pretty much your best bets when trying to take a swing trade. They usually have high transaction volumes and liquidity in active markets. However, note that the larger the stock, the harder it is to move and reasonably, the less volatile it’ll be.

Choosing the right stock to swing trade is balancing the two metrics – volatility and liquidity. This means that you need to choose stocks that have enough transaction volumes to fill your orders, but also ones that have enough volatility to offer you opportunities in the first place.

The pros and cons of swing trading

Pros

• You could make decent money – Since swing trading involves capitalising on short-term trades, you could make a decent return without holding up your capital for too long.
  
• Reduced transaction costs and brokerage – Compared to day trading, swing trading usually involves lower transaction costs and brokerage, since traders don’t execute several trades within the same trading session.
  
• Time – Swing traders can work outside trading hours to research and manage their positions, which gives them more time to conduct due diligence than day traders who mostly have to analyse and place bets in real time.
  
• Low stress – This variety of trading is usually low stress, which means that it is suitable for full-time professionals who don’t have too much time.

Cons

• Exposed to market risks – Stocks in the short and long-term are exposed to extra market risks like price dips due to negative events, or action on the weekends.
  
• Low diversification – By focusing solely on one swing trade for a period of 6-8 weeks likely leads to low diversification. A portfolio consisting only of swing trades could be overexposed to market volatility.
  
• Limited exit potential – Since swing trades predict specific price action and account for losses only through stop loss orders, traders can oftentimes find it hard to exit without having to bear losses.

Things to keep in mind

Swing trading, like we noted above, is mostly about noticing and capitalising on upcoming price action. These analyses and predictions could be made with technical analysis by identifying common price patterns, understanding volume, and gauging market sentiment.

However, sometimes, strategies can also go haywire. Swing trading is a specialised skill. It’s not something that is suitable for every investor and their individual investing goals. You must remember that it’s one thing to know what a chart is, but it’s another to know how to read it.

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You don’t know what you don’t know

Traders must also remember that although trading tools like buy-and-sell orders, trading volume, and other data points may provide you with information that could formulate winning strategies, there are too many unknowns and moving parts.

While you might be absolutely spot-on with your trade prediction, one piece of breaking news could ruin the impending pattern for months.

Hence, we encourage you to do your own research before you decide to indulge in swing trading. Make sure you have the risk appetite and capital to learn by doing. Until then, we wish you the best of luck!