Swing Trading and Its Strategies
Swing Trading is a strategy that refers to the practice of trying to profit from market swings. Swing trading tactics focuses on taking smaller gains in short term trends and cutting losses quicker. The gains might be smaller, but done consistently over time they can compound into excellent annual returns. Swing Trading positions are usually held a few days to a couple of weeks but can be held longer. In terms of length of holding a trade, swing traders are in-between day traders and trend traders.
Swing trading primarily uses technical analysis, due to the short-term nature of the trades. That said, fundamental analysis can be used to enhance the analysis. If you're interested in swing trading, you should be intimately familiar with technical analysis.
Swing trading not to be overlapped with day trading as day trading may seem like similar practices, but the major differences between the two have a common theme: time. First, the time frames for holding a trade are different. Day tradings are in and out of trades within minutes or hours. Swing trading is generally over days or weeks.
The goal of swing trading is to capture a chunk of a potential price move. While some traders seek out volatile stocks with lots of movement, others may prefer more sedate stocks. In either case, swing trading is the process of identifying where an asset's price is likely to move next, entering a position, and then capturing a chunk of the profit if that move materializes.
There are a variety of methodologies to capitalize on market swings. Some investors prefer to trade after the market has confirmed a change of direction and trade with the developing momentum. Others may choose to enter the market on the long side after the market has dropped to the lower band of its price channel—in other words, buying short-term weakness and selling short-term strength. Both approaches can be profitable if implemented with skill and discipline over time.
Let's start with the basics of a swing trading strategy. Rather than targeting 20% to 25% profits for most of your stocks, the profit goal is a more modest 10%, or even just 5% in tougher markets.
Swing trading isn't easy, and no strategy or setup works every time. With a favourable risk/reward, winning every time isn't required. The more favourable the risk/reward of a trading strategy, the fewer times it needs to win in order to produce an overall profit over many trades. The goal is to continually increase the performance percentage of the average winning trade.
A swing trading style, by contrast, may have a few transactions some days and nothing on others. Positions can be checked periodically or handled with alerts when critical price points are reached rather than the need for constant monitoring. This allows swing traders to diversify their investments and keep a level head while investing.
As mentioned, other methods can be used to profit from the market's short-term swings. The important point is to develop a method that works and implement it consistently; adhere to explicit money management rules; and keep good records so one can track your progress.