Swing trading refers to a style of trading in which positions are held for a period of days or weeks in an attempt to capture short-term market moves. In general, swing traders rely on technical analysis and price action to determine profitable trade entry and exit points, paying less attention to the fundamentals. Trades are exited when a previously established profit target is reached, when the trade is stopped out (moves a certain amount in the wrong direction) or after a set amount of time has elapsed.
Because swing trading takes place over a period of days to weeks (with an average of one to four days), this trading style does not necessarily require constant monitoring. As such, traders who are unable to monitor their positions throughout each trading session often gravitate toward this popular trading style.
Swing Trading Methods
Using a set of mathematically based objective rules for buying and selling is a common method for swing traders to eliminate the subjectivity, emotional aspects, and labor-intensive analysis of swing trading. The trading rules can be used to create a trading algorithm or “trading system” using technical analysis or fundamental analysis to give buy and sell signals.
Simpler rule-based trading approaches include Alexander Elder’s strategy, which measures the behavior of an instrument’s price trend using three different moving averages of closing prices. The instrument is only traded Long when the three averages are aligned in an upward direction, and only traded Short when the three averages are moving downward. Trading algorithms/systems may lose their profit potential when they obtain enough of a mass following to curtail their effectiveness: “Now it’s an arms race. Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits,” observes Andrew Lo, the Director of the Laboratory For Financial Engineering, for the Massachusetts Institute of Technology.
Identifying when to enter and when to exit a trade is the primary challenge for all swing trading strategies. However, swing traders do not need perfect timing—to buy at the very bottom and sell at the very top of price oscillations—to make a profit. Small consistent earnings that involve strict money management rules can compound returns over time. It is generally understood by whom? that mathematical models and algorithms do not work for every instrument or market situation.
Why Swing Trading makes Sense for Traders
Swing trading are short term strategies to take advantage of price swings, either reversing back to the median or fading a rally.Increased leverage and ease of getting money has resulted in traders moving away from higher risk trading style like trend-following trading or pattern based trading to swing trading. In India however, most traders, especially retail traders are still working on trend following techniques, candle sticks are conventional pattern based techniques. Swing trading are in fact best for retail traders as institution investors and professional big ticket traders do not generally follow these style on account of the short holding period and relatively small profits than what they are looking for.
A swing trader looks to trade in liquid stocks/indices which are trending. They generally avoid flat markets, which is why some people call swing trading as momentum trading. For a swing trader the basic premise for any trade is that trend is your friend. There are many methods adopted by traders to identify a trending stock, like using the ADX (average directional index), moving average convergence divergence (MACD) or fast moving averages.