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What is Swing Trading?

5paisa Research Team

Last Updated: 26 Feb, 2025 09:00 PM IST

What is Swing Trading
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Swing trading is a stock investment strategy where profits are made over several days or weeks. Swing traders analyze stock price patterns to anticipate when prices will rise, allowing them to buy low, and when prices will fall, enabling them to sell high.

The goal of swing trading is to make money by buying a stock or option at a low price and selling it later at a higher price. But, just like surfing, there's a risk of wiping out. Sometimes the price goes the wrong way, and you end up losing money instead of making it.

This is where beginners can struggle. Losing money, especially when you're just starting, can be discouraging. So, while swing trading can be a good way to make money in the stock market, it's not without its challenges. It takes practice, patience, and the ability to handle the ups and downs.

If you're new to swing trading, few things you should know.

Have a Plan: Before you start swing trading know what you want to achieve and how you'll do it. Having a clear plan helps you stay focused.

Be Disciplined: Stick to your plan and don't let emotions sway your decisions. Discipline is key to successful swing trading.

Be Patient: Learning swing trading takes time. Don't expect to make big money quickly. Patience is important as you gain experience.

Use a System: A good trading system can guide your decisions and increase your chances of success. There are many systems to choose from and finding one that works for you is crucial.

Be Flexible: Stock market is always changing so be ready to adapt. Flexibility allows you to adjust your strategy based on market conditions.
 

What is Swing Trading?

Swing trading is a method where traders buy and sell stocks based on expected price trends, which could last from a single night to several weeks. The goal is to profit from the short-term ups and downs within a larger trend. Traders use technical indicators to spot when a stock has momentum and decide the best time to buy or sell. Since swing trading focuses on quick moves, traders need to act fast to maximize their chances of making a profit. This approach is all about capturing gains from brief price shifts within the broader market trend.

How Swing Trading Works?

Swing trading targets short term price fluctuations both upward and downward, within a broader market trend.  Instead of holding onto a stock for months to make a large profit, in swing trade traders aim to capture smaller, more frequent gains that can add up over time. For instance, while some traders wait months for a 25% profit, swing traders might achieve multiple 5% gains weekly, potentially earning more in the long run.

In swing trade traders use daily charts to find the best times to buy or sell but some prefer shorter time frames, like 4-hour or hourly charts to make quicker decisions. This strategy is all about making consistent, smaller wins that accumulate into returns.

What’s the Difference Between Swing trading and Long term Investing?

Aspect

 Swing Trading (Short term ) Long term Investing
Time Horizon Short term outlook, trades last from a few days to weeks. Long-term outlook, investments held for many years.
Approach to Volatility Market volatility is closely monitored and often capitalized on for quick profits. Volatility is generally disregarded as long term investors focus on the overall growth trajectory of the investment.
Investment Strategy Focus on short term price movements, to buy low and sell high within a short timeframe. Emphasis on identifying fundamentally strong businesses expected to grow steadily over time.
Stock Selection Stocks are selected based on short term market trends, technical analysis and quick profit opportunities. Stocks are chosen based on fundamental analysis, looking for companies with solid growth potential.
Portfolio Composition Involves a smaller number of high volatility stocks or other assets for quick profits. Diversified portfolio comprising a mix of stocks, bonds, mutual funds and other long term investment instruments.
Risk Tolerance Tends to involve higher risk due to the short term nature of trades and potential for rapid market changes. Generally lower risk as investments are chosen with a long term perspective, minimizing the impact of short term fluctuations.
Monitoring and Management Requires frequent monitoring and active management to capitalize on short term market movements. Requires less frequent monitoring as investors focus on the long term growth prospects of their investments.
Profit Objective Aim to make quick profits by short term price fluctuations. Aim to build wealth steadily over time through the growth of the invested assets.

Advantages and Disadvantages of Swing Trading

Swing traders make decisions based on the risk and reward of a trade. They study an asset’s chart to decide where to buy, where to set a stop-loss and where they can sell for a profit. For instance, if a trader risks ₹100 per share with the chance of making ₹300, this is a good risk/reward ratio. However, risking ₹100 to make only ₹75 is less attractive.

Swing traders mainly use technical analysis, which means looking at charts and patterns because their trades are short term. Sometimes, they also check the company’s fundamentals to ensure the stock has good potential. For example, if a trader sees a stock chart showing a possible rise, they might check if the company’s financial health is strong.

Swing traders use daily charts but may also use shorter time frames, like one hour or 30 minute charts, to find  proper entry, stop loss and profit taking points.

Pros of Swing Trading

•    It takes less time compared to day trading.
•    It aims to profit from short term market swings.
•    Traders can focus mainly on charts, making the process simpler.

Cons of Swing Trading

•    Positions are exposed to risks overnight and on weekends when markets are closed.
•    Sudden market changes can lead to losses.
•    Traders might miss out on bigger, long term trends while focusing on short term moves.

Indicators for Swing Trading

Moving Averages: Moving averages smooth out price fluctuations to show the overall trend direction. When prices are above the moving average, it suggests an uptrend, when below, a downtrend.

Bollinger Bands: Bollinger Bands is an indicator that shows high and low points for stock prices based on the average price over a certain time period, like 20 days. These bands help traders figure out if a stock is overbought or oversold compared to its usual price. When prices hit the top band, it might mean the price is too high and when prices hit the bottom band, they might be too low..

Relative Strength Index: RSI is a momentum indicator used in trading, showing if a stock is overbought or oversold. Values range from 0 to 100, with over 70 indicating overbought and under 30 indicating oversold.

MACD: MACD is a popular technical indicator used in trading to identify trend changes and momentum shifts. MACD uses two lines a fast one and a slow one. It compares two exponential moving averages of a stock's price over different time periods, like 12 days and 26 days. When the faster line crosses above the slower way, it could mean the stock's price is gaining momentum and might go up. When it crosses below, it could mean the opposite.

Conclusion

Swing trading is about making money by buying and selling stocks relatively quickly, usually within a few weeks or months. Instead of focusing on long-term growth, it's about finding short-term trends that can bring fast profits. To do this well, you need to keep an eye on recent stock price movements and any important news. And always have a clear strategy in place before you start trading.

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing. For detailed disclaimer please Click here.

Frequently Asked Questions

Swing trade can require various indicators to help them make their trading decisions, from simple visual charts to more advanced indicators.

A common tool used to conduct a swing trade is the moving average crossover (MACD). This indicator shows whether an asset's price is trending up or down. Another tool is the momentum indicator. This indicator shows whether an asset's price is accelerating or decelerating. The stochastic oscillator (STOCH) uses a variation of RSI to show whether an asset is overbought or oversold.
 

Most financial experts recommend using stocks or bonds as swing trading instruments since they are less volatile than other investments like currencies or commodities.

Swing Trading is a type of trading that involves multiple trades taking place within a short period. This trading is different from day trading, which is trading one single security daily.

Swing traders use smaller positions than day traders and have fewer margin requirements. Swing trades usually go with the market and not against it.
 

The effectiveness and ability to conduct swing trading successfully can differ from investor to investor. However, it is a strategy that's been around for decades, and there are plenty of reasons to feel comfortable with it. Suppose you’re looking for lower-risk and higher-volume trades that are easy to control. You have the right understanding of market movements to judge the direction of your selected stock group. In that case, swing trading could be the right choice for you.

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