Swing trading follows a similar pattern to fundamental trading, where positions are opened and closed over longer time periods than standard trades. In fact, fundamental traders are copying swing traders patterns. This is due to changing industry developments that take several days to generate the profit a swing or fundamental trader is trying to achieve. Swing trading is more complex than this, it involves a strategy of trading that merges between day and trend trading.
What actually is a swing trade?
Swing trading involves implementing short term strategies that take advantage of price fluctuations in the markets. Also referred to as momentum trading, it is a strategy that aims to generate smaller gains in short term trends and cutting your losses more quickly.
Positions in swing trading are generally held for a few days to up maybe a few weeks. The overall goal is to utilise the bigger price moves than within a day trade. By using technical indicators, day traders look at currency pairs with trends in price movements. This provides a signal for the time to buy or sell. If trading stocks, swing traders are generally not looking at the long-term value of a particular stock.
Developing a swing trading strategy
The focus of a swing trader isnt on creating gains over months of years. The average trade of a swing trader is over a couple of days and weeks. Through this method, a trader will accumulate multiple small wins and benefits from the impact of compounding. Small % gains can accumulate into considerable profits.
What stocks should I select for swing trading?
The ultimate key to successful trading is selecting the right stocks for your strategy. Selecting the most liquid stocks will be helpful as it means there will always be a buyer and seller. Within a live market, these types of stocks will generally be swinging between a high and low range. The swing trader will choose one particular trend direction for a select period of time and switch the pattern to cash in and start following the next trend when it develops. This strategy can be applied to numerous currency pairs which are very liquid.
The right market for you
Swing traders prefer markets that arent necessarily going anywhere. The best trading opportunity is when stock markets rise for several days, then decline for the next few days. These types of market trends will continue to repeat this pattern regularly, providing plenty of opportunities to make a profit. Several months could pass with markets trading within a particular range. During this period, the swing trader has had several opportunities to trade on the daily movements.
Trading on Upward Trends
Upward trending stocks will rarely move in a straight line but in a zig-zag movement. A stock may go up for a few days and then drop for a few days, before proceeding to climb up again. Long-focused swing traders will be looking for an initial upward movement as a timely opportunity to make a trade.
Making gains on the upside
It cannot be predicted how long a correction may last and so you should look to enter a swing trade only once it is clear there is an upside trend. When looking at trading options, consider implementing a risk to reward scenario i.e. your potential profit should be more than twice as much as your potential loss. If the ratio is higher, the risk to reward is attractive, but if it is lower then it is likely not worth the risk of making the trade.
What is your main focus?
In contrast to long-term investment plans, swing traders will focus not on the core fundamentals of a stock or economic plan, but on selecting a trend and trading accordingly. Although swing traders do need to understand market developments, finding a trend is the main goal.
The risks of swing trading
Whilst swing trading may be focused on common sense, it can be a risky strategy. Successful traders are focused on creating consistent gains over short periods of time. This strategy is potentially at risk to unexpected industry developments. Swing traders have to understand that a stock could open in a completely different pattern to the previous day.
In conclusion, swing trading is one of the best trading techniques for new traders to enter the industry. Swing trades generally take a while to deliver results which enable a trader to develop the core abilities to understand trends and patterns. A trader looking at trends has the potential to generate significant profit if they can identify trends which will last for a few weeks. Having the ability to let trades play out will result in generating consistent profits.
