There are many types of trades which are executed by traders. Here in this article we are going to cover Swing trading. We will go through Swing Trading, swing trading strategies, how to swing trade, swing trade stocks and more.
What is Swing Trading?
Swing Trading is one of the types of trading that traders use to capture trades for short to medium term which ranges from overnight to a few weeks. Trade is executed on the basis of trend. Traders use technical and fundamental analysis in order to find stocks which have high momentum and help to earn high profits in a short time. Though fundamental analysis is not given much importance. Traders can be long as well as short on the stock and earn profits on it through swing trading.
Swing Trading Strategies
There are many swing trading strategies but here we will go through a few of them. Swing Trading is based on news and multi day chart patterns (technical analysis).
Moving Averages Crossover
Moving Average is one of the trend indicators. When one simple moving average (SMA) crosses over another moving average there can be reversal in trend.
When shorter duration of SMA cuts from above to longer duration of SMA and it goes below then stock can be in bearish trend or when shorter duration of SMA cuts from below and goes above longer duration of SMA, then stock will be in bullish trend.
Red: 10 days Simple Moving Average
Blue: 20 days Simple Moving Average
Here short and long is the duration of SMA (for e.g. 10 days, 20 days)
Case 1 (from left): Here 10 days SMA cuts from above of 20 days SMA and goes below it. This shows that in the short term stock will be in bearish trend.
Case 2 (from left): Similarly, 10 days SMA cuts 20 days SMA from below and goes above it. This shows that in the short term the share will be in a bullish trend.
Cup and Handle Pattern
This pattern will look like a round cup followed by a handle pattern which will have a slight downward slope. This pattern is considered a bullish continuation pattern.
If a stock is in bearish trend and then chart shows cup and handle pattern then there will be high chances of trend reversal and it will be in bullish mode.
If a stock is already in bullish mode and it forms this pattern then it is predicted that it will remain in bullish mode.
Cup should have a U pattern rather than a V. When the pattern starts it should have high trading volume, which decreases eventually and then increases again.
Head and Shoulders pattern
It is one of the patterns which helps to predict trend reversals. In this chart pattern three peaks are formed. In which two peaks on either side are nearly of the same height and one which is in the middle will be the highest. First and third peaks have the same height and they fall back at the support which is also called the neckline.This shows that it will turn into a bearish trend.
Inverse head and shoulder pattern
There is also an inverse head and shoulder. Which shows that the stock will go in a bullish trend from bearish. In these the first and third bottom will not be as low as the head will be.
Support and resistance triggers
Support and resistance are the pillars for trading in the stock market. Using this strategy you can perform successful swing trading.
Support level is the level below the current market price. It is predicted that stock price wouldn’t go below support because at that place there will be high buying pressure and it overcomes the selling pressure. Even if stock is in bearish trend then also price will turn up back again.
Resistance is the exact opposite of Support. It is the level above current market price. Where selling pressure can overcome buying pressure. It helps for trend reversal of bullish trend to bearish trend.
Support and resistance are determined by past records of a stock. Whenever stocks breaches either resistance or support, there will be exchange of roles of support and resistance.
MACD stands for Moving Average Convergence Divergence. It is one of the most known indicators used for swing trading strategy. MACD consists of two lines one is MACD line and another one is signal line. If the MACD line crosses above the signal line, it is recommended that buy trade should be executed because a bullish trend is indicated. Similarly, if the MACD line crosses below the signal line, a bearish trend is indicated and it suggests that one should execute sell trade.
Swing Trade Stocks
One should pick stocks which do not have very high volatility. One should select stocks which are trending in slightly bullish or bearish mode. It can also be selected on the basis of news. One should start his/her trading career with paper trading rather than doing real trading in the market.
One of the examples of swing trade stocks.
Tata motors share was in the news before the budget 2021. The main reason was that according to reports, the scrappage policy of vehicles was going to be introduced in the budget 2021. On 1st Feb 2021, the annual budget was presented. Also vehicle scrappage policy was introduced.
Now lets see the price action of Tata Motors on 1st Feb 2021
It was almost Rs 280. Within two days on 3rd Feb 2021, it went up to Rs 340, 20% of returns in just two days.
Though trading just on the basis of news is very harmful for your money. Your trade should be backed by technical analysis, in order to attain a certain level of confirmation.
How to do swing trading?
One should first do technical analysis to find out the best stock to do swing trade.
- Choose an entry point and buy the share
- Apply stop loss in order to minimize risk.
- Determine exit level and sell at that level.
Trading can be very harmful if you don’t apply stop loss. It can eradicate your whole wealth if you don’t trade with discipline. Rakesh Jhunjhunwala, Big bull of Indian Stock market once said, I am not afraid to make a mistake, but only make what I can afford.