Swing trading can best be defined as a style of trading that tries to make the most of short-term or medium-term returns in any financial instrument over a period ranging from a few days to several weeks. This trading style is applied while trading in stocks mostly. Among the various trading strategies that investors and traders use, swing trading makes the use of technical analysis to gain knowledge of the right stocks to invest in.
Trading strategies and trading styles are different with different traders and what works for one may not yield any gains for another. If you wish to use swing trading, then you should be prepared to, not only indulge in some technical analysis to discover trends in prices of stocks, but look at the behaviour of stocks of particular companies carefully. Fundamental analysis is undertaken by traders who use different trading styles while they are trading online, having studied patterns of stocks beforehand. Typically, with swing trading as a strategy used, traders hold a long or short position that may last more than one trading session. However, this holding position won’t last for more than a few months. This is generally seen in swing trading, and by no means, exemplifies a rule. In case the market is in an extremely volatile state, then swing trading may occur on the same day. This is a situation that is rare.
Among trading strategies, the goal of the style of swing trading is to catch a load of a potential shift in price. Here are the main features of this trading style:
- Swing trading may expose investors and traders to weekend and overnight risk factors, in which prices may gap, opening a subsequent session at a significantly different value.
- Swing traders may earn profits through an already formed reward/risk ratio, according to a target profit or stop loss. Additionally, they can have losses and profits based on the movements of prices or indicators of a technical nature.
- Traders who engage in swing trading may select highly dynamic stocks, providing a large degree of movement. Others favour stocks which are more sedate.
- In the process of swing trading, the identification of where a stock’s, or any other asset’s, price is going to go next, is undertaken. The rationale is that if you know where the price will go, you can enter a position to get a huge amount of the profit, as long as what was predicted materialises.
- As swing trading uses a predictive style to consider where a stock will shift, it is also known as ‘speculative trading’.
- The only thing that swing traders are concerned about is to profit from a price move, collect their rewards, and go to the next viable opportunity.
Commonly, swing trading styles are adopted by traders who evaluate trades on a reward and risk basis. Traders study charts and decide where they can enter, put a stop loss, and then determine where to exit with a profit. Say, a swing trader is risking Rs.100 per stock in a session that could result in a Rs. 300 gain. This is a fruitful reward and risk ratio. To understand more about swing trading and more gainful trading styles, you can open a Demat account or visit Motilal Oswal and earn and learn more about it.
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