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Stock prices are constantly making new highs and lows, and looking for trading opportunities between price points and booking profits is called swing trading. It means taking a position in an asset for a minimum of 2 trading days and potentially for weeks. This type of trading is less volatile than intraday trading and less time-consuming than long-term positions.
Swing trading is well-suited for part-time retail traders who want to explore the stock market but cannot monitor markets constantly. Swing traders often do it as a second source of income and for short-term investment opportunities.
In this article, we explore the many nuances of swing trading, its advantages and the associated risks, and some popular swing trading strategies.
Also, read Is Swing Trading Better Than Day Trading here.
Key Takeaways
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Swing trading gets its name from the price movements between upward or downward stock price swings.
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Swing trading means taking trade positions to seize short term to medium term price movements typically lasting two days to a few weeks.
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Swing trading offers flexibility of time and is well suited for traders that cannot monitor the market constantly.
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Swing traders rely heavily on fundamental and technical analysis, studying price charts, patterns, and indicators like RSI, MCAD and moving averages to identify entry and exit.
What is Swing Trading?
Swing trading is a strategy that focuses on capturing gains in a stock or other financial instruments over a short to medium term, typically from a few days to several weeks. This method involves identifying and exploiting price swings and momentum in the market, using technical analysis to guide entry and exit decisions. Unlike day trading, swing trading positions are held longer but not as long as typical buy-and-hold investments.
Swing trading for beginners is a popular form of trading in which the traders hold their position for more than a day. By definition, it is the direct opposite of day trading – doesn’t require traders to square off their position in a day. Swing traders usually target a larger market share and wait for a deal to emerge for the underlying – when it happens, they trade in the direction of the trend. Swing trading is one of the fundamental forms of trading.
Best Time for Swing Trading
The best time for swing trading can be determined by factors like the trader’s strategy, risk appetite, capital and market momentum. While most traders prefer to trade using charts on a daily time frame to spot trading opportunities, using 1 hour and 4-hour time frame charts help identify precise entry exit points and broader support resistance zones. This aids the trader to recognise trades in a shorter time frame during a broad movement.
Typically, swing trades can last from two days to a few weeks, allowing the trader to let the move play out and book higher profits. The best time for swing trading is when there is enough data to confirm trends without relying on short term movements.
How does Swing Trading Work?
Swing trading is a strategy that involves capitalising on the short-term price movements of stocks or other securities, focusing particularly on those with high activity and significant price fluctuations. This approach can be broken down into a few key steps:
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Selecting a Suitable Stock
Picking up the right stocks is the first and crucial step in a successful swing. You need to confirm that the stocks you select are in an uptrend. Secondly, the stock you select must also have volume and liquidity in the market. Large-cap stocks are deemed right for swing trading. In an active market, these stocks fluctuate by a wide range of high and low extremes. Swing traders will ride the wave and trade in the direction of the trend before switching positions when the trend changes in the opposite direction.
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Performing Technical Analysis
After pinpointing a potential stock, the next step is thoroughly analysing its price movements and patterns. This is typically done using technical analysis tools such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD), volume indicators, and trend lines. Additionally, staying informed about relevant news and developments in the company and its industry can provide insights into potential future performance.
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Establishing Entry and Exit Points
With the analysis in hand, the next step is determining the optimal points for entering and exiting the trade. A common strategy is to set a stop-loss order, usually around 5% below the entry price, to minimise potential losses. Concurrently, setting a target price—often about 15% above the entry price—helps lock in profits. The idea is to buy near the stock’s support level and sell near its resistance level, capitalising on the 'swing' or the expected price movement between these two points.
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Understanding the Movement
The essence of swing trading lies in understanding and predicting the 'swing' or the oscillation of stock prices between their support and resistance levels. By identifying these levels and the stock's tendency to rebound from support and move towards resistance, swing traders aim to buy low and sell high within a relatively short time frame.
How to Select Stocks for Swing Trading?
Like any trading, selecting the right stock for swing trading is also crucial. While taking swing trades, traders must ensure the asset they select must have high liquidity and is traded in large volumes. Stocks with high momentum typically present several entry and exit points, allowing participants to ride the dips and rally without taking excessive risks.
Swing trading requires a robust trading strategy that is backed by using technical indicators like order books, MACD, moving averages and relative strength index for analysis. Once these indicators point towards a financially profitable trade. These stocks are now ripe for trend reversal making them ideal for swing trading and booking profits. Historical data of a chart in a monthly, weekly and daily time frame can also be indicative of the stock’s potential for a successful swing trade.
Highly speculative and slow volume stocks aren’t well suited for swing trading as it could lead to being stuck in positions without much movement while blocking your capital with no real gains.
What is the Difference Between Swing Trading and Long-Term Investing?
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Aspect |
Swing Trading (Short Term) |
Long-Term Investing |
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Time Horizon |
Focuses on short-term trades, lasting from a few days to weeks. |
Investments are held for many years. |
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Approach to Volatility |
Pays close attention to market ups and downs to make quick profits. |
Long-term investors usually ignore short-term volatility. |
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Investment Strategy |
Tries to buy low and sell high in a short period, based on price changes. |
Looks for strong companies that will grow steadily over time. |
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Stock Selection |
Picks stocks based on short-term trends and technical analysis for quick gains. |
Chooses stocks based on solid company fundamentals and long-term potential. |
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Portfolio Composition |
Often includes a small number of high-risk, volatile stocks or assets. |
Typically diversified with a mix of stocks, bonds, and other long-term assets. |
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Risk Tolerance |
Higher risk due to rapid market changes and the short-term nature of trades. |
Lower risk as it's based on long-term growth, not short-term swings. |
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Monitoring and Management |
Requires regular, hands-on management to react to short-term market moves. |
Less frequent monitoring, as the focus is on the long-term growth of investments. |
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Profit Objective |
Aims to make fast profits from short-term price swings. |
Aims to build wealth slowly and steadily over time. |
Indicators of Swing Trading
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Moving Averages: Moving averages help smooth out price changes to show the overall trend. If the stock price is above the moving average, it signals an uptrend, while being below it indicates a downtrend.
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Bollinger Bands: Bollinger Bands help identify when a stock might be overbought or oversold by showing high and low points based on the stock’s average price over a period (like 20 days). If the price touches the upper band, the stock could be overbought, while hitting the lower band might suggest it’s oversold.
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Relative Strength Index (RSI): RSI measures momentum to see if a stock is overbought or oversold. The index ranges from 0 to 100—anything over 70 means overbought (likely to fall), while below 30 means oversold (likely to rise).
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MACD: MACD helps spot trend changes and shifts in momentum. It compares two moving averages (like 12-day and 26-day). When the faster line crosses above the slower one, it’s a sign the stock might be gaining momentum. When it crosses below, it suggests the stock could be losing steam.
Swing Trading Strategy
Swing trading got its name because it tries to gain from price oscillation - upward or downward swings. Swing traders use an array of technical trading tools, like day traders, only for a period that is close to position trading.
Swing traders use popular trading tools like Bollinger Bands, Fibonacci Retracement, and moving oscillators to form strategies. Besides, traders also keep a close watch on emerging patterns in multi-day charts like
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Head and shoulders pattern
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Flag pattern
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Cup and handle pattern
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Triangle pattern
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Moving Average Crossover
Let’s take a look at simple swing trading strategies.
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Fibonacci Retracement: Traders involved in swing trading know that stocks tend to retrace sometimes at different levels before reversing again. Fibonacci retracement lines help traders identify support and resistance levels. Traders draw horizontal lines at different % levels, like 23.6%, 38.2%, and 61.8%, to identify potential reversal levels. For instance, when the trend is downward, a trader can plan a short trade at the 61.8 Fibonacci line, functioning as a resistance level, where the price retraces before bouncing off and exits when the price touches the 23.6 Fibonacci line or the support level.
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Support and Resistance: Support and resistance lines are the two most important indicators for traders who follow the trend. Support identifies the bottom level of a trading range, and resistance represents the ceiling. Asset price moves within the range, but it indicates a reversal when it crosses the support or resistance level. Price above the resistance level is identified as an overbought situation, and it may indicate the buying pressure will recede and selling forces will take over. Similarly, the area below the support line is where overselling occurs. A swing trader will enter a selling position when the price bounces off at the resistance, placing the stop-loss level just above the line.
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Bollinger Bands Method: Bollinger Bands (BB) are price bands on both sides of a moving average trend line. It creates a range between which asset prices move. Swing traders use Bollinger Bands to plan entry and exit points in the market.
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Channel Trading: Channel trading is a simple method involving trading assets showing a strong trend line and trading within a channel. For example, you’ll plan a sale when the trend line is downward and touches the upper limit of the channel before bouncing off down. Traders using channel trading as the tool always trade with the trend signals.
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Using SMA: Another popular swing trading method is the simple moving average(SMA) line. The SMA is a continuously updating line where each data point represents the average price of an asset. 10 and 20-day SMAs smooth out the noise.
The trader will place the two SMA lines against each other on a trading chart. When the shorter SMA (10 days) crosses over the longer SMA (20 days), trades plan entry signals an uptrend. Conversely, when a longer SMA crosses the shorter SMA, it triggers a sell signal.
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MACD Crossover: The MACD consists of two average lines – the signal line and the MACD. It generates trading signals – buy or sell – when the two lines cross. In a bullish trend, the MACD will switch over the signal line, triggering off a buy signal.
The trend will reverse to bearish when the MACD line falls below the signal line, indicating selling opportunities. MACD crossover is a popular swing trading technique.
So far, we have discussed the standard swing trading methods that will give you a heads-up. But there is more to it. The second thing is how to manage your trade. There are two established methods for that -
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Passive trade management
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Active trade management
A passive trader will wait until the market hits stop loss or the profit target and ignore any movement in between. As the name suggests, an active trader will monitor the market movement to decide their next move.
Why is Swing Trading Important?
A swing trade lasts more than a day but less than trend trades, which can emerge over weeks or months. Swing trading sits at the midpoint of the two extremes, looking at profiting from short-duration price movement arising from changes in corporate fundamentals. The key to profit from swing trading lies in picking up the right stocks (stocks that tend to grow in short duration).
While waiting for a larger profit to emerge, swing traders make several small wins to add to their ultimate profit. This helps them secure a more substantial profit volume. But to do that, swing traders keep their stop-loss at 5% and maintain a 3:1 risk-to-reward ratio, with take-profit orders at 15%. It is done to avoid risking too much. A big loss can wipe away all the small gains made from smaller swings. To avoid making mistakes, swing traders carefully choose the stocks.
The Bottom Line
Swing trading means trading methodically with the trend. Swing traders don’t try to make a big profit in one shot. They wait for the stock to hit the profit level so they can sell. It is considered a good technique for beginner traders, but if you are an intermediate or advanced trader, you can swing trade, too.
Swing trading doesn’t demand much of your time like scalping or day trading but allows you to see the profit mature over time. However, to swing trade, you would need discipline and technical understanding to make the winning deals. To start with swing trading, open your Demat account and Trading account with Angel One today. Go to the Angel One website or download the Angel One app to complete the process in a few easy steps.