Hello friends and welcome to another informative podcast by Angel One.
Let’s dive right in by defining Swing Trading. Swing Trading is a method of investing in the stock market. Traders who practice Swing Trading hold stocks for a few days to a few weeks, lying in wait for a substantial price hike before selling them. The better the trader’s estimation of the perfect time to sell, the better are his profits. This is in dire contrast to the typical trader – in essence a day trader – who buys and sells all his stock within a single trading day, holding no stock overnight.
Swing trading is just one among several methods of stock market investment. According to experts, traders should ensure the trading method that they favour works well with the stocks that they intend on trading. It does make sense – after all, you’re very unlikely to garnish a daal makhani with oregano and similarly it is rare to see someone douse a pizza with schezwan sauce. Indeed, there are norms and reasons for certain foods being paired with others and similarly, there are certain norms and reasons for certain stocks being paired with certain methods.
Before you select stocks for swing trading, you need to zero in on two key aspects:
· One – how many days or weeks do you intend to hold your stock for?
· Two – what are your profit goals?
Once you have thought this over and noted it down, you are ready to proceed with stocks selection specific to Swing Trading and in line with your goals.
Here we go then – a step by step guide to identifying stocks that are popularly seen as ideal matches for a Swing Trading strategy.
Step number 1: Install a reliable mobile app to allow you to keep tabs on charts and indicators Download the Angel One App from the Play Store. It is absolutely free of cost and setting up the app is both quick and without hassles. Your trading platform must not only serve the purpose of enabling you to buy and sell stock but must also double up as a reliable resource. It must provide access to tools of the trade that will support your efforts towards price prediction. If you recall, at the start of this podcast, I mentioned that the success of a Swing Trader (and the same is true for any trading method) is the ability to predict stock price movements and therefore the correct time to sell. These “tools of the trade” include minute charts and significant indicators. The Angel One App, for example, allows you to add stocks to your watch list wherein you can keep an eye on them and evaluate them using various charts and indicators.
Step number 2: Add stocks to your watchlist and start observing them Go completely stalker on the stocks and track price movements carefully. You need to be diligent with your keeping an eye on stock price movements and you must use relevant indicators regularly. The two best indicators to employ when it comes to Swing Trading are Moving Averages and Relative Strength Index. Here’s how to work them:
Moving Averages will help you identify the average price of a trend during a given period (which will correspond with the amount of time you intend to hold your stock). So let’s say you want the average price of a stock over a two-week period…. what you will get is the total of all prices during the period divided by the number of days or in other words – an average. Traders compare this price to the current stock price – they are looking to see whether the price is moving closer to or away from the average, in order to predict its price in the future. Now let’s look at how traders use the Relative Strength Index indicator to predict stock price movements. RSI will always be a number somewhere between 1 and 100. A higher RSI number indicates overbuying and an inflated price while a lower RSI number indicates a deflated price. Traders try and anticipate price correction based on the RSI number. If the RSI number indicates that the stock price is inflated, traders usually anticipate a price decrease in the near future and the same is true vice versa.
Step number 3: Develop an eye for detail when it comes to patterns I don’t mean to sound preachy folks, but this is a “practice makes perfect” proposition. You need to make a habit of looking at stock price graphs to the point that you’re able to spot patterns at a glance. You know how it is – a top chef can simply taste a teaspoonful dish and tell you what went into it or what’s missing. Salesmen at clothing stores will often know exactly what shoe size, shoulder size or waist size you need to try. This is not because they were born with some amazing talent for shoulder size match-making but simply because they have matched so many shoulder sizes with so many shirts that they can now tell at a glance. Same with the chef – he wasn’t born with keener taste buds; he has just worked with flavours for a very long time. And the same goes for traders – you need to have seen so many graphs that anomalies or patterns jump out at you at first glance.
Step number 4: Look at stocks that show good volatility during your chosen time period Let us say you are interested in XYZ stock which has a historic high of Rs 75 and a historic low of Rs 51. In recent times the price has been fluctuating between Rs 58 and Rs 67. You have fixed a profits goal of Rs 8 to Rs 9 per share. So XYZ stock evidently works. But then you realize that within a two-week period the price fluctuation is only Rs 1 to Rs 2 per share. As a result you need to eliminate XYZ stock and look for a better fit with another stock. Look across sectors and be patient. You’ll find the right fit eventually.
Well that was your tutorial on how to choose stocks for Swing Trading. I hope it has been helpful. Stay safe and happy trading!