Swing trading is popular among a great number of newcomers to the stock exchange market since they will prefer something different from the speedy day trading. This approach gives a more easily controllable speed of trading, and aims to capture the ‘swing’, or movement, of the markets within a given period of time.
Swing trading is especially suitable for the beginners and newcomers to the trading since it is rather equal in terms of the application of the technical analysis, while requiring much less attention to the constant control over the market that other types of the trading might require. This article explores the fundamentals of swing trading and helps you understand its potential advantages.
What Is Swing Trading?
Swing trading is a trading strategy whose goal is to make profits on a short to mid-term time horizon of several days up to several weeks on a chosen company’s stocks (or any other security).
Swing trading involves holding over stocks for a couple of days so as to be able to catch big price moves or swings. The aim of swing trading is to make money using price movement or momentum in the market and this technique can be used to all tradable assets including stocks, commodities and foreign exchange.
How Does It Work?
Swing trading operates on the premise that prices rarely move in a straight line. Instead, they tend to rise and fall, creating opportunities for traders to buy low and sell high.
Swing traders use a variety of technical analysis tools to identify potential entry and exit points. Typical time frames for swing trading range from a few days to several weeks. It allows traders to capitalize on anticipated market movements. Various strategies, such as trend following, reversal trading, and breakout trading, are used to maximize profits while managing risk.
How To Pick The Right Stock For Swing Trading?
Choosing the right stock is crucial for successful swing trading. Here are some factors to consider:
- Liquidity: Make sure that the current position occurs at a high traded stock implying that it can be easily bought and sold without much loss in stock price.
- Volatility: Geared towards searching for stocks that have enough volatility activity. Volume volatility can be huge due to high volatility and thus creates very profitable chances.
- Fundamental Strength: That stated, even though swing trading depends more on technical analysis, learning about the business fundamentals will assist in steering clear of companies with problems.
- Technical Indicators: In order to get entry and exit calls use tools like moving averages, MACD and RSI.
- Market Trends: It is necessary to follow general trends on the marketplace, which affect the given stock.
Choosing The Right Market: Bull Vs. Bear Market
Understanding the market environment is vital for swing trading. The strategies used can vary significantly between bull and bear markets.
Bull Market
A bull market can be defined as the conditions in the stock market when the prices are constantly increasing and investors feel rather optimistic. During this period there are normally high corporate earnings, low unemployment and high consumer confidence. In general, to buy shares investors are more willing, expecting even higher prices in the future and thus the market goes up.
Bull Market Characteristics:
- Rising stock prices
- High investor confidence
- Economic growth
- Lower unemployment rates
Bear Market
On the other hand, a bear market identifies a decline in the prices of stocks and widespread bearishness. Such an environment is characterized by fluctuations in the economic indicators like low corporate profits, increasing layoffs and low consumer dependencies. Unlike the bull market scenario where the investor is willing to take high risks and buy shares in order to enhance the inflated prices, the bear market investor is more cautious since he or she wants to avoid making heavy losses, and thus the culture of selling amongst the investors puts further pressure on the downward trend of stock prices.
Bear Market Characteristics:
- Falling stock prices
- Low investor confidence
- Economic slowdown
- Higher unemployment rates
Tips to Use the Exponential Moving Average
EMA is very useful for the swing traders as it utilizes the present price data and discards the noise to help traders define trends easily. Here are some tips on using EMA effectively:Here are some tips on using EMA effectively:
- The Trend Reversal using EMAs is most effective when two or more EMAs are used For instance the 20 day EMA and 50 day EMA.
- Use changes in position of the two lines; when the shorter EMA crosses the longer one in the upward direction or when the shorter one is crossed by the longer one in the downward direction as signals for entry or exit.
- Use EMA in conjunction with another technical indicator so that one can be sure that what is being indicated is the truth and not an error.
Using Baseline Value
The baseline value in the context of swing trading is a point of reference when evaluating stocks. It could be a moving average or a fixed particular price level. The identification of baseline value assists the traders in identifying the points at which one can enter into the particular market or when he or she should leave the particular market. For instance, if the price of a stock is above the base level, it can be a time to buy the stock while if it is below the basing level it can mean it’s time to sell the stock.
Taking Profits
Taking profits at the right time is crucial for maximizing gains in swing trading. Here are some strategies:
- Set Profit Targets: Fixed price level should also be determined in order to sell at a certain level so as to lock in some profits. This can be done at a level that has been previously offered some resistance or a fixed percentage move up.
- Trailing Stops: Employ trailing stop orders so as to protect profits as the value of the stock goes up in your direction.
- Scalability: It can be a good idea to exit the positions gradually in order to take some of the profits while leaving the rest to continue to make targets.
- Risk Management: It is always prudent to respect the risk to reward ratio at all times in order to have a favorable comparison of risk and reward.
Conclusion
Swing trading makes it easy for new entrants to the stock market since they do not require so much knowledge. As a short to medium term strategy, which seeks profit-making opportunities it offers sound compromises that can be implemented without having to keep abreast with the market day fluctuations.
Knowledgeable swing trading specs, how to choose the stock as well as how to analyze it by utilizing technical signs and overcoming the profit’s management problem makes a beginner have the courage to trade swing trading. Like with any other investing strategy, it is imperative that swing traders keep on learning as well as practicing. Spend some time to get a good grasp of the basics, keep abreast with developments in the field of trading and approach trading with over time strategy formulated goals to success in trading.
