The financial markets offer a lot of opportunity for every individual who wish to brave it. There are countless benefits and risks that you can encounter upon entering the markets. This is mainly the reason why numerous trading methods are developed. One of the most popular trading method in the field is swing trading.
Well-placed and well-thought swing trading strategies can help you counter the different risks that you might encounter during your trading journey. There is no known way for you to actually remove them permanently. But with these swing trading strategies, you’ll at least be able to protect yourself from suffering through heavy damages.
Some of the other trading methods and strategies include: day trading, trend trading, and short selling.
In this article, we’ll be tackling swing trading: what it is, what the advantages and disadvantages are, as well as the various swing trading strategies you can use.
What is Swing Trading
Swing trading attempts to capture gains in various trading instruments within a short period of time. This can last to as short as overnight or sometimes over the course of several weeks. It’s also known to be one of the most popular forms that active trading takes.
Most swing traders practice technical analysis when looking for stocks with short-term price momentum. These traders can also use fundamental or intrinsic value of stocks aside from analyzing the price patterns and trends. This method can involve a mixture of fundamental and technical analysis.
When utilizing swing trading, you should act quickly as a trader. You must be “quick on your feet”, as they say, when it comes to finding situations wherein the stock has exceptional potential to move in short time frame. This makes swing trading mostly limited to at-home and day traders. One of the reasons for this limitation is that large institutions trade in sizes too big to move too quickly. With swing trading, you’ll be able to exploit short-term movements without needing to compete with the major traders.
Learn more about Day Trading and how it works.
Usually, swing trades depend on the larger time frame charts. These charts include the 15-minute, 60-minute, daily, and weekly charts. The trades also tend to require more holding time to generate the anticipated price move.
One of the goals of swing trading is to capture a possibly larger price move than on an intra-day basis. Swing trading takes on a larger price range and price move which requires careful position sizing in order to minimize the downside risk.
Things to consider when deciding to become a Swing Trader
You should consider becoming a Swing Trader if:
- You are willing to make fewer trades but more careful. This is to help ensure that your trades are very good setups.
- You consider yourself to be a patient person.
- You can remain calm even at times when trades move against you.
- You wouldn’t mind setting up large stop losses.
You might want to consider other options if:
- You tend to lean more towards fast paced, action-packed trading.
- You are not a patient person. If you would like to know the results immediately, swing trading might not be for you.
- You easily get anxious when trades are not going your way.
- You don’t have the time to spare to analyze the markets.
Pros and Cons of Swing Trading
Pros of Swing Trading
· Does not necessarily need to be a full-time job
The top two requirements for trying swing trading are knowledge and investment capital. As a swing trader, you wouldn’t need to be attached to your computer screen for the whole day. This is mostly because you now have a longer timeframe; having days to weeks as opposed to minutes to hours. With this, you can trade while also maintaining a separate full-time job. Just make sure that you don’t constantly check the trading screens while at work.
· No need for constant monitoring
As was previously established, swing trading does need constant monitoring. You can make use of stop losses. This is to ensure that you won’t be losing too much in cases when the market goes against your way.
· Great potential for significant profits
Generally speaking, trades need time to provide bigger profits. Keeping a trade open for a longer period of time will have a higher probability of providing higher gains than trading in-and-out of a single security multiple times a day.
· Does not require expensive investment
You can use swing trading with a single computer and conventional trading tools. You don’t need to have state-of-the-art technology of day trading.
Cons of Swing Trading
· Risk of substantial losses
This doesn’t really ever go away. Just like with any other trading style, swing trading also has the potential to result in substantial losses. Swing traders hold positions longer than day traders which mean that there’s also a bigger risk of incurring larger losses.
· Higher margin requirements
Swing trading usually involves holding trades overnight. With this, margin requirements tend to be higher. Maximum leverage is usually twice the amount of your capital.
Swing Trading Strategies for Stocks
1. Fibonacci Retracement
You can use the Fibonacci retracement pattern to help identify the support and resistance levels. Knowing this will help you in determining the possible reversal levels on stock charts. Plotting horizontal lines at the classic Fibonacci ratios of 23.6%, 38.2%, and 61.8% on a stock chart can show the potential reversal levels.
2. Channel Trading
With this strategy, you’ll first have to identify a stock displaying strong trend. After that, you also need to make sure that the stock is trading within a channel. You should consider opening a sell position upon plotting a channel around bearish trends. The position should be opened during a bounce down off the top line of the channel. When swing trading with the use of channels, you should always remember to trade with the trend.
3. MACD Crossover
This type of trading system provides a simple way to determine various opportunities to swing trade stocks. It’s one of the most popular indicators used to identify the trend direction and reversals. The MACD is made up of two moving averages, which are the MACD line and the signal line. Buy and sell signals usually show up when these two lines cross.
If the MACD line is the one crossing over the signal line, that indicates a bullish trend. You should then consider entering a buy trade. If it’s the other way around, the signal line crossing over the MACD line, then that signifies a bearish trend. It’s highly suggested for you to enter a sell trade.
4. 10- and 20-day Simple Moving Averages (SMA)
Simple moving averages (SMAs) are the ones responsible for smoothing out the price data. This can be achieved by calculating a constantly updating average price which can be taken over a range of specific time periods. Using SMAs is also one of the most popular swing trading techniques in the field,
You’ll be applying two SMAs to your stock chart when using the 10- and 20-day SMA swing trading system. When the shorter SMA (10) crosses over the longer SMA (20), a buy signal will be generated. This indicates an uptrend underway. However, if the opposite happens, this indicates a downtrend.
5. Support and Resistance Triggers
These denote the foundation of technical analysis. You can build a successful stock swing trading strategy around the support and resistance lines.
Basically, a support level represents the price level or area on the chart below the current market price where buying has enough strength to be able to overcome selling pressure. A decline in price might be stopped and turn back up once more. As a stock swing trader, you can enter a buy trade on the bounce off the support line. You can then place a stop loss below the support line.
On the other hand, resistance is the price level or area above current market price where selling pressure may be able to overcome the buying pressure. This can result to the price turning back down against an uptrend. You can place the stop loss above the resistance line. The bounce off the resistance level can help you when entering a sell position.
There are different techniques you can use to ensure your success in trading. These factors can help you decide if swing trading is the right trading method for you. After that, you can choose which strategy will suit you best during your trading activities.
There are various reasons that can influence your decision to enter the market and use the swing trading method. You should carefully consider every factor to know whether swing trading is the right method for you.
Find out if your intended trades will work well with your chosen method and strategy. You have to ensure that you’re investment portfolio will stay intact before making any decisions that can possibly harm or improve it.
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