Swing Trading: Definition, How it Works, and is it for Beginners?

Swing trading is a short to medium-term trading strategy where traders aim to capture gains in financial instruments such as stocks, options, currencies, or commodities by holding positions for a period ranging from a few days to several weeks. Swing trading’s main goal is to take advantage of price swings or fluctuations in the market. Trading possibilities abound for swing traders because to the wide variety of technical indicators available for spotting trends, reversals, and other short-term price movements. The “swing” in asset price, from one value to another, is where the name of the trading technique originates from.

The most crucial thing is to keep a close eye on the fluctuating value of various assets. Then, when the moment is right, you may cash out at a profit after entering the market at the right price. It’s important to note that not all traders will close their position immediately; others may want to hold on to it for many weeks.

This method is often used by institutional investors that retain their investments for extended periods of time. These buyers retain assets in the hopes of making a profit from price variations; they plan to sell when the asset’s value has grown significantly.

The swing trading approach is widely utilized and is sometimes recommended for new traders. Due to the reasonable time spans involved, it is a reasonably easy approach to communicate ideas about the market. Swing traders participate in the majority of financial markets, including foreign exchange, stock, and cryptocurrency exchanges.

Swing trading’s exact origins remain obscure. It is believed to have started sometime around 1900. It likely began with investors who noticed that trends existed within the stock market and saw opportunities to make money by buying and selling at strategic times. Swing trading became more prevalent during the 1970s due to electronic trading platforms that made buying and selling stocks faster possible. Swing trading gained even greater traction during the 1980s with several books published about its topic such as Robert Miner’s “Swing Trading” and Joe Duarte’s “Swing Trading for Dummies.”

What is Swing Trading?

Swing trading is the attempt to capitalize on price fluctuations in the market that last anywhere from more than one trading day to many weeks. Swing trading is successful and provides a unique vantage point from which to study both the short- and long-term dynamics of the market if losses are contained by employing stop-loss strategies. Actively traded equities and ETFs with a history of fluctuating mostly within predetermined trading ranges are the primary targets of swing traders. To learn the ins and outs of the price movement of potential investments, it is important to have a list of stocks and ETFs to track on a regular basis.

Swing trading is a strategy that relies on mathematical rules and algorithms to eliminate subjectivity and emotional aspects. This approach uses technical or fundamental analysis to create trading systems that give buy-and-sell signals. Perfect timing is not necessary, and small consistent earnings and strict money management can compound returns over time. However, as more sophisticated algorithms emerge and gain a mass following their profit potential may decrease. It’s essential to recognize that mathematical models and algorithms may not work for every instrument or market situation, and traders should adapt their strategies accordingly.

How does Swing Trading work?

Swing trading works by taking advantage of the market’s short-term volatility. The trader purchases and sells shares in a very short period of time in order to profit from market fluctuations. The key to successful swing trading is identifying the current trend and buying/selling securities at the optimal time to gain on short-term price swings.

Traders typically employ technical analysis techniques, such as chart patterns and indicators, to determine the current trend in swing trading. The trader will then decide whether to purchase or sell based on the trend, with the intention of generating a profit. Frequently, swing traders will utilize leverage to boost their earnings, but if the market goes against them, this can also raise their losses.

Swing trading is an excellent method for profiting from the market’s short-term volatility. However, it is essential to comprehend the present trend and employ risk management measures to prevent losses.

One popular swing trading strategy that could be implemented successfully is the Moving Average Crossover strategy. Begin with identifying a liquid share that has clear price fluctuations and trends; 

Let’s use Reliance Industries Limited (RELIANCE.NS). Select two moving averages with distinct timeframes – typically, the 50-day and 200-day moving averages are used as short and long term averages respectively. Plot the SMAs 50 days and 200 days respectively on your stock’s price chart. Pay close attention to how moving averages interact with stock prices. A 50-day simple moving average (SMA) crossing over its 200-day SMA indicates upward short-term trends and could signal the ideal opportunity to purchase. RELIANCE.NS may provide a prime opportunity for entering long positions.

As soon as the 50-day simple moving average (SMA) crosses below 200-day SMA it can be considered a bearish sign and indicates short-term trends are moving in a downward direction, signaling it may be time to short or sell the stock (RELIANCE.NS in particular should consider selling their shares or entering short positions).

Once the moving averages have crossed in the opposite direction from your initial entry signal or your profit or stop-loss target has been met, exit the trade. Before applying this strategy in real trading scenarios, it’s essential that it meets both your trading goals and risk tolerance requirements.

What are the advantages and disadvantages of Swing Trading in the Stock Market?

The biggest advantage of swing trading is It captures the majority of market swings, which maximizes the potential for short-term profits. The biggest disadvantage of swing trading is the potential for pricing disparities throughout the nighttime and weekend periods.

Below is a list of the main advantages and disadvantages of swing trading.

Advantages of swing trading

• Trading in a swing might help you save precious hours. Swing traders are able to trade whenever they have free time. This kind of trading eliminates the need to monitor prices on a computer for long periods of time. Instead, you’ll choose the investments you want to make after careful consideration, trade them, and then go on your merry way. Keeping a close eye on the transaction is unnecessary. This kind of trading may be quite useful for working individuals who are attempting to fit trading into their busy schedules.
• In theory, you will profit from the market’s surge over the following few days, and you will profit again when the market falls back, as it inevitably will. This will allow you to maximize your gains and reduce your risk using swing trading.
• Swing trading, in contrast to day trading, involves fewer deals overall. This makes sense given that swing traders, in contrast to intraday traders, who must make numerous transactions per day to amass their profits, can afford to be pickier with their investments.
• Swing trading is a good middle ground between the extremes of day trading and long-term investment. If you’re a swing trader, you may work with a lot more flexibility and a lot less of a long-term commitment than if you were a long-term trader. But it need not include the frenetic speed of a day trader and the limited opportunity for reflection that comes with it.

Now, let us look at some disadvantages of swing trading.

• Overnight, when the market is closed, there may be significant shifts in market conditions. If such a move goes against your trade, you can be in for a harsh awakening the following morning when you check your position and see that it has been negatively affected. Even if you place stops, there is no guarantee that you will be safe from it.
• The goal of swing trading is to make a profit off of small price fluctuations. One common trading strategy is to join at the start of a fresh swing and exit at the start of a downturn. However, you run the risk of passing up a terrific stock that would have returned more money if kept for the long term.
• Day trading is a high-stakes game of “get in, play the day, and get out,” whereby no positions are kept beyond the close of trading for the day. However, with swing trading, the trader is often committed to holding a stock for a longer period of time, which might leave them more vulnerable to market fluctuations.
• Swing trading costs less than day trading every deal, but over the course of many months or years, the total cost might add up to a significant sum.

How to use Swing Trading in Stock Market?

Swing trading can be used in the stock market to make a profit from stock market volatility that lasts a few days. Below is a step to step guide on how to use swing trading in the stock market.

Swing trading is used in the stock market to make a profit from stock market volatility that lasts a few days. Here’s a step-by-step guide on how to use swing trading in the stock market.

1. Open a live trading account

Open a live trading account, to begin with. You may also establish a demo account to practice the swing trading methods in a risk-free environment.

2. Use technical analysis

Research markets using technical analysis tools to identify trend reversals and other price indications to educate your swing trading efforts.

3. Pick an asset and time frame

Decide on the asset and time frame you want to swing trade once you’ve done your homework. Also, depending on your swing trading signal, select your entry and exit plan.

4. Apply risk management conditions

Include a stop loss and take profit in order to reduce risk. This risk management tools aid in the consistency and relevance of your transactions concerning your trading plan.

5. Monitor your position

Keep an eye on your open trade. Watch for gapping, slippage, and shifts in market sentiment.

6. Exit the market

Close the trade according to your swing trading method if your stop loss has not exited the transaction.

Picking the correct assets is critical as well with swing trading. Use the following pointers to improve your market selection efforts.

– Utilize chart patterns to detect reversal patterns, such as double or triple top chart patterns.

– Keep an eye on the economic calendar to understand a country’s economic health and future trading possibilities and hazards.

– Consider using earnings calendars to account for unexpected market changes.

Swing trading is a style of trading that combines fundamental and technical analysis to capture significant market movements while minimizing downtime. Retail traders that are well-informed can take advantage of factors such as market direction, direction bias, liquidity, performance, frequent trading patterns, clear uptrends, correlation, and volatility to benefit regularly in the market. 

What are the tips for successful Swing Trading for newbie Swing Traders?

What can make swing trading successful for newbie traders are some tips. Below are some tips for swing trading beginners can use.                    

• it’s essential that you conduct adequate research. There are resources both online and at libraries that can provide essential knowledge of this trading strategy.
• Start small. For novice swing traders, starting small is wise when beginning swing trading as this will limit losses if mistakes arise,
• Stop-loss orders help protect your profits. A stop-loss order allows you to avoid further financial loss should a stock’s price drastically drop below an agreed-upon level, thus helping prevent additional money from being lost from an unexpected price drop.
• Keep your patience when swing trading. Be patient and focus on finding good setups at the appropriate times before entering and exiting a trade.
• Start With A Plan. It is vitally important that before beginning trading, a comprehensive plan be drawn up that details your trading goals, risk tolerance, and strategy.

Swing trading is an immensely profitable strategy, but it is always risky. Take your time learning as much as possible before risking larger sums of money in larger trades If you are new to swing trading.

How to choose the right stock to swing trade?

Choosing the right stocks to swing trade is critical as it can make or break your trade. Below are the steps you can follow to ensure you choose the right stocks.

• The liquidity of the stock: One of the characteristics of equities that are suitable for swing trading is their level of liquidity. A stock’s trading volume in the market is directly proportional to its level of liquidity. Therefore, a stock’s demand and prospective growth are both likely to increase in proportion to its level of liquidity. Most of the time, swing traders in India will initiate swing trades on equities with a high degree of liquidity. An extremely liquid stock is also less hazardous than one with a low level of liquidity.
• Checking stock screeners: You are going to require the assistance of an investing platform regardless of the trading method that you choose to use. This assists you in screening for stocks and brings profitable chances directly to your front door. Now, the process of developing screeners is only the first step; nonetheless, ensuring that this step is completed successfully is of the utmost significance. If you don’t hit the target, you’ll end up with prospects who aren’t very good. You will be putting yourself in a position to fail right from the beginning. You may begin to design your screener by outlining your criteria. The screener you use may rely on momentum indicators to assist you in locating companies that have excellent timing. Another possibility is that your screener is centered on the top stocks in a certain industry or sector. The particular screener that you put up will be determined by the technique that you choose. However, momentum-based indicators are likely to be your most valuable asset while engaging in swing trading in particular. This is due to the fact that you are only interested in profiting from fluctuations in stock prices and do not place a high priority on a company’s underlying performance. Therefore, it’s possible that the screener you use for swing trading is created using indicators like RSI, Moving Averages, Volume, Bollinger Bands, or Stochastic.
• Stock performance: You should search for companies whose performance has been consistently better than that of the general index, as well as any sectoral or broader stock market indices. You will be able to choose high-performing stocks that are at the forefront of their respective industries in terms of their trading performance if you do it this way.
• Market direction: Traders follow a rule that says that if a stock’s value is increasing despite the existing market environment, it will continue to increase in value if market characteristics stay unaltered. This rule is used in the context of trading. You may locate the stocks that are doing the best by using a variety of methods, such as tracking stock indexes, researching business news, or pursuing the companies that are performing the best on the market.
• Volatility: Considering an investment in a company that made headlines over night due to an unexpected increase in its price might be difficult to resist. High volatility, on the other hand, may work both ways: the faster highly volatile equities climb to the top of the market, the faster they can also tumble back down to the bottom of the market. As a result, it is prudent to choose equities for swing trading that are somewhat consistent and have low to moderate levels of volatility.

When is the best time to use Swing Trading in Stock Market?

There is no best time to swing a trade. Rather, an investor should look at the case of the individual should carefully gauge the state of stocks they choose to swing trade and decide accordingly. At the same time, the time frame of swing trading is extremely important. The time frame in swing trading refers to the time between a stock entry and exit. 

The time range that you go with will have a significant impact on how successful this method is. Long-term trends that occur over extended time periods are more stable, but they are more difficult to see. The movement of the trend in short time frames is represented by candles that are smaller in terms of pips, and as a result, the yield per transaction is lower.

Swing trading may be done successfully with almost every time frame, but there is a certain approach that should be used with each one. When dealing with shorter time frames, the speed with which decisions are made is essential, however, when dealing with longer time frames, swing trading and position trading may be mixed. In the next section, we will go through the advantages and disadvantages of the primary time frames for swing trading.

Is Swing Trading a Profitable Trading Strategy?

Yes, swing trading is a profitable trading strategy if used rightly. Your adoption of a swing trading strategy will be one of the primary factors that determine how much money you can earn from trading. It seems to reason that a successful plan will result in more financial rewards than an unsuccessful one would.

However, the majority of individuals who are interested in trading do not really have a trading technique that works, despite the fact that they feel they have. Before you can know for certain if you are working with something that is effective, you need to test the plan out using facts from the past. 

Is Swing Trading a good strategy for beginners?

Yes, swing trading is considered a good strategy for beginners, but you will need to have your plan sorted out. Gap and go is a strategy beginners employ. The gap and go method is frequently used by day traders, who trade equities that have seen substantial price gaps, either upwards or downwards, on high relative volume. The gap that is produced by significant results or corporate news is the source of the intraday volatility that is the greatest. On the other side, announcements about mergers and acquisitions often cause gaps, but they do not cause volatility when the market opens. This is because, in most cases, the precise price per share for the M&A transaction has already been publicized.

Is Swing Trading Better than Day Trading?

Intraday trading refers to any transaction that is entered into and then closed off on the same trading day. This comprises both long and short positions in a stock. It is also possible to execute it in derivative markets, such as futures and options, in addition to the cash market. Swing trading is defined as any transaction that has a holding duration of between five and ten days. 

Your full-time attendance is required Monday through Friday between the hours of 9:00 am and 3:30 pm for intraday trading. Real-time analysis is usually the method of choice when trying to determine whether stocks have momentum. One day in advance is not enough time to make a decision on which stocks to trade intraday. It’s not that every day is lucrative, but if you follow certain logical processes, you can end up with net gains after a certain amount of time has passed. As a result, intraday trading needs to maintain a presence in the market for a sustained length of time.

The analysis for swing traders may be completed before the conclusion of the trading day; it is possible that the trader’s presence is not required during the whole of market hours. You just need access to the market in order to execute the transaction.

Intraday trading is the kind of trading that should be done if you want to make a career out of trading stocks. Positional trading is an option to consider if your primary goal in trading is to generate passive income. Knowledge of the stock market in great detail is required for any trading technique in order to minimize financial losses.

Is Scalping Trading a good alternative for Swing Trading?

No, scalping is not a good alternative for swing trading as the time frame of the booth is different. Scalp trading is participating in a greater number of transactions while focusing on achieving relatively modest gains from each individual deal.

In contrast, swing trading includes a smaller number of deals but aspires for much bigger gains from each individual trade.

Scalp Trading is a kind of day trading that may be thought of as a subset. Scalpers, on the other hand, often aim to enter and exit the market within a matter of minutes, and sometimes even seconds. This contrasts with the typical day trader, who could purchase a stock at ten in the morning and sell it at one in the afternoon.

A greater emphasis on position trading is included in swing trading. Swing traders try to make a profit by trading off of support and resistance levels that are relatively close together within a larger trend. They often begin a trade with the expectation that they would be able to exit the deal at a profit within a few days to a few weeks after entering the trade. In addition to this, it has been said that they want bigger returns per transaction in comparison to scalp traders.

What are the differences between Swing Trading from Other Trading Strategies in Stock Market?

Swing trading is different from other trading styles mainly due to the time frame and strategy used. 

Comparing swing trading and day trading, the length of time that the item is held for is the primary distinction. Day traders are required to terminate all of their positions before the opening of the market, while swing traders must maintain at least one position overnight. In day trading, positions are only held for the duration of a single trading day. Positions in swing trading are often maintained for a period of several days to many weeks.

Swing trading entails an unanticipated overnight holding risk of either a gap up or gap down upon the commencement of a stock’s trading session. Swing trading often involves taking smaller position sizes than day trading does since the trader is aware of the inherent risks involved. When opposed to day trading, swing trading has a lower level of leverage. Day trading often entails a very high level of leverage, which is around 8 to 10 times the initial capital.

Comparing swing trading and scalping, the primary benefit of swing trading in comparison to scalping is reduced trading expenses, as a direct result of smaller trading volume, fewer hours spent, lesser trades, and fewer overall transactions. Because swing trade positions may be established in as little as a few days or as much as a few weeks, swing trader does not have to continually watch their holdings regularly.

Swing trading often involves a smaller number of deals than other trading strategies, but it may result in a larger overall profit. Therefore, swing traders are able to earn the same amount of money as scalpers while participating in activities that are less dangerous and require more time. In the same vein, traders who engage in scalping are shielded from the substantial losses that are linked with a single deal.

Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.