What is swing trading strategy?
Swing trading is one of the highly rewarding trading strategies in financial markets. Swing trading strategy involves holding an asset over a short period to capitalize the short-term movements to make an income. Swings traders utilize the market swings to take favorable entry and exit. Swing trading does not require much active participation like intraday trading, so it is the most preferred trading style in financial markets. As swing traders have exposure to overnight positions, the trading style involves considerable risk and keeping effective risk management is very prominent to brace capital from uncertain overnight events.
Selecting fundamentally strong and high growth stocks for swing trading is very relevant. If the market is affected by any global or local market sentiments, excellent quality stocks can easily recover and can deliver good returns to investors. Major strategies used by swing traders include breakout trading, chart-pattern based trading strategy, trend line strategy, pull back strategy and many more. Swing traders must master any of these strategies and develop a high probable trading system to become a profitable swing trader in financial markets. Swing traders can use technical indicators, price action and can use both to take informed decisions in the market.
Swing trading strategies
Breakout trading strategy is the most used swing trading strategy in the market. Traders use breakout strategies to identify and capitalize the short-term momentum of an asset. Breakout strategy includes support and resistance-based breakouts, chart pattern-based breakouts and trend-line breakouts. Breakout traders identify the breakout and breakdowns of asset price and capitalize the price momentum. Breakouts can be confirmed with volume to avoid false breakouts in the market.
Trend-line strategy is the strategy used by a trader when the asset is either in an uptrend or in a downtrend. Trader plots a trend line in the chart and waits for a pullback to make an entry. A trader enters a trade when the price of an asset is at trend-line support and targets the price to reach trend-line resistance to make an exit. Trend line strategy-based traders place a stop-loss behind the trend-line to avoid huge losses in the market. Trend-line strategy is a high probable swing trading strategy.
Moving average cross over
Moving average Strategy is also one of the popular Swing trading methods used in stock market. Moving average crossover strategy is strategy used by traders when the short-term moving average crosses above the long-term moving average. Traders enter a long position when the bullish crossover happens and enter a short position when the bearish crossover happens in moving average. Moving average crossovers helps the traders to identify the potential trend reversal in the market and capitalize the movement.
Result and News based strategy
Results and News based strategy is one of the high-risk high reward swing trading strategies. Traders take pre result strategy and post result strategy in market to make an income. Traders take pre result strategy anticipating the result and can earn higher reward. Post result strategy includes understanding the market sentiments after an event and takes position in market accordingly.
Swing Trading Advantages and Disadvantages
Advantages of swing trading
Swing trading is the best trading method for part time passive traders. Swing trading does not require active participation in the stock market so working people can also prefer swing trading for generating passive income from the market. Intraday trading and trading in derivative segment require active participation, so working professionals and students find it difficult to trade in stock market. Therefore, swing trading is the best passive income generating trading method available in the stock market. Swing trading also has associated risks, so traders are advised to have good risk management and to acquire basic market knowledge.
No Auto square off Risk
Swing trading does not have any auto square off risk associated. So, Swing traders are not forced to exit their position from the market. Swing traders can hold their positions as much as they wish to hold. Even though swing trading does not have any auto square off risk, poor risk management can create capital block for swing traders.
Capitalize short term movements
Swing trading does not require in-depth fundamental study of a stock. Proper technical analysis helps the trader to understand the momentum of a stock and can capitalize the movement. It is advisable for swing traders to select fundamentally strong and high growth companies as fundamentally weak companies are prone to overnight risk and can cause huge losses for swing traders.
Stress free trading method
As the active participation is very less for swing trading, traders can generate a passive income from the market without affecting their mental health. Trading style like intraday trading is a highly stressful trading method which requires huge skill and risk management to earn consistent profits eventually.
Even though swing trading requires much active participation, it is one of the most rewarding trading methods. With swing trading it is possible for traders to target at least 5-10% of the market. Swing traders can also make profit in any market condition. With proper knowledge traders can take swing trade positions in derivative market also to make a revenue even when there is bearish sentiment in market.
Disadvantages of swing trading
Requires huge capital – swing trading strategy requires big capital, if traders want to earn handsome returns from market. Brokers are not willing to provide extra margin for swing trading method as they provide leverage for intraday trading.
Overnight Risks – The biggest disadvantage of swing trading method is the overnight risk. Any negative global cues, company related news, local cues can hugely impact the stock and market. Gap ups and gap downs can also be a major risk factor for swing traders. So, it is important for swing traders to select fundamentally strong stocks trading along with proper risk management and diversification to sustain the stock market.
Capital Block – Poor risk management in swing trading will lead to capital block for traders. Keeping stop-losses is very prominent for swing traders. Traders who bring in emotions in trading and fail to execute or keep stop losses will create huge losses in trading. Stop loss is the most important risk management for swing trading to sustain in stock market and to make profits consistently in long run. Traders must have a goal-based entry and exit strategy in swing trading to avoid huge losses in market.