When trading in financial markets, swing trading is based upon the fluctuations or waves found in an upward or downward mid term trend. Price fluctuations are usually behind these waves, which mostly occur in stock markets, even though all markets experience this. Stock prices are usually caused by either bearish or bullish forces which are driven in their respective directions by demand variations. However, these waves are not symmetrical in nature and are thus difficult to determine or predict. Regardless they exist and once identified, tend to repeat themselves.
For instance, there will be brief periods in an upward trend where the upward path of stock’s price falters briefly and can drop. These interruptions are what are known as pull-backs.
Thus, in an upward trend, each successive pullback has higher high prices and higher low prices than its predecessor.
How to Identify Trends?
The first thing you will need to do is to identify a stock that is ideal to trade and one which displays all the characteristics of an uptrend or downtrend. For instance, in the case of stocks in an uptrend, look to identify those stocks which are experiencing a pullback. In case of stocks in a downtrend, look for those which are experiencing a pull-up. For both of these things, you will need to conduct a thorough technical analysis.
Technical analysis is helpful in isolating behavioral patterns in the market, enabling you to predict the trend and future behavior. You can use tools like Simple Moving Average or Price action to identify trends.
Choosing the Right Market
Even the most active of stocks do not experience the same up-pulls and down-pulls, regardless of whether there is a bullish or bearish market condition. The trend, regardless if it is upwards or downwards will persist for a long period of time in a single direction only. This is why you should never buck the trend. The best strategy thus is to trade on the existent long-term trend.
You will however experience periods where the market trends are stagnant and going nowhere. It can be considered neither bearish nor bullish when this happens, which is also optimal for swing traders. This is due to the behavior of stock price indices which rise for a few days and then have a period of decline over the subsequent days. The frequent down-pulls and up-pulls in the trend tend to repeat the same pattern over time. As a swing trader, you have many opportunities to catch the short-term price movements during the more frequently up and down activity. This is despite there being no overall gain in the stock’s price. The main thing here is correctly identifying what type of market you are in.
How to Identify Stocks For Swing Trading?
Swing trading methods involve making stock positions which one will hold for longer than a single day. Thus, the success of stock swing trading is choosing the right stocks to trade. The most preferable stocks to trade in are mostly large-cap stocks. Large-cap stocks are the most traded in the major exchanges around the world and because of their high trading rates, they are suitable for trading in an active market.
Large-cap stocks seem more attractive for beginners and less experienced traders as larger market players cannot influence the market direction. This is mainly because large institutions do not have the ability to buy or sell these large volumes quickly enough to create volatility. This is what causes the “swing” in large-cap stocks, which in turn create the potential profits. However, these profits are only within a narrow, safe spread between high and low prices.
As a swing trader, you will want to trade in the trend’s direction for a couple of days or weeks. When you see that the major trend of the trade reverses direction, reevaluate and switch to the opposite flow. However, if you are a beginner, always stick to the flow of the direction and avoid trying to buck the major trends.
How to Apply Swing Trading?
The main aim of swing trading is to first identify and then capitalize on the predictability of the pattern. As a stock trader, you will require to buy stock during the pull back when its price is dropping and ideally is at the pullback’s lowest point. Hold the stock until the next highest point and look to sell before the next pull-back to maximize profits.
Swing trading can also be done during a downward or bearish trend, as they also possess the same predictable wave characteristics. The main difference here is that the downward trend is interrupted by many up lefts where stock prices rally before dropping once more. In such a case, you can identify a downtrend by a series of lower highs and lower lows at the peak of each pull-up.
Advantages of Swing Trading over Day Trading
The main difference between swing traders and day traders is that the former works on stock price movements over periods more than a single day, while the latter works on stock variations during the market opening times and close out their positions at the end of each trading day.
The fact that day traders work on such tight timelines requires tremendous focus. It is quite common for day traders to typically watch multiple screens day long to react to any sudden price volatility. On the other hand, since swing traders are more concerned with changes to their position over multiple days, they can take a much more relaxed, hands-off approach when monitoring stock price movements. This allows more critical stock position decisions to be more informed and take less toll on your mind compared to day trading.
Swing trading in the stock market is an easy way to make money provided you get the basics properly. As a swing trader, you should always look to trend on an uptrend unless you are more risk-tolerant, in which case you can trade on a downtrend as well. Always try to find the path with the least resistance by looking early on the price line and following the trend.