What Is Swing Trading And How Does it Work? You Should Know.
Stock market trade involves the holding of stocks to benefit from their price rise. While different stocks have different returns, the most common stock trading involves buying and selling stocks. Since not all traders are alike, various forms of trading evolved to accommodate the needs of the different traders. Exchange floor trading housed day traders who speculated on minute price fluctuations. Investment firms and indexes grew to accommodate the needs of trend traders and long term investors. The shift to digital trading introduced more flexibility in trading by increasing the ease and rapidity of transactions and reducing their complexity. That allowed the possibility of more tailored investments designed to take advantage of momentum signals.
What is Swing Trading?
Swing trading is a trading style that involves holding on to a position for a period of time ranging from a couple days to a couple weeks.
It’s an active trading strategy that captures the swings in market sentiment and allows you to enter and exit at key levels. Swing trading differs from day trading in that you are likely to hold your positions overnight. Your trades might last several days or even weeks.
Swing trading strategies are generally driven by technical analysis. You can employ your strategy in trending markets as well as in choppy market conditions.
How Swing Trading Works?
The process of swing trading involves capturing a part of an expected price move over a few days or several weeks, rather than larger gains over longer periods of time. To do this, a swing trader may target a certain profit point and utilize a stop loss order for execution. The trader may also use technical analysis to anticipate price moves, and strategically take profits.
After capturing a piece of the anticipated price movement, the swing trader can move on to identify the next potential opportunity. The idea behind swing trading is to capture multiple small to medium wins, which can add up to one big total return.
Swing Trading vs. Day Trading: What’s the Difference?
Swing trading and day trading are very similar. Both involve buying and selling stocks in an attempt to make a profit, but the biggest difference between them is time.
Swing traders will hold onto a stock for days or weeks while the price continues to rise or fall. Day traders don’t have the swing trader’s “patience” (we’re using the term very loosely here). They’re swapping stocks in a matter of hours (or even minutes), buying stocks while sipping their morning coffee and selling them off before they go to lunch, so to speak. This kind of trading amplifies the time commitment, emotional stress and risk involved with buying and selling stocks. You can join a forex forum for learn more about forex trading, day trading and swing trading.
Swing Trading Strategy That Works
This strategy is really only made of two elements. The first element of any swing strategy that works is an entry filter. For our entry filter, we’re going to use one of our favorite swing trading indicators aka the Bollinger Bands. The second element is a price action based method.
1. Wait for the price to touch the upper Bollinger Band.
The first element we want to see for our simple trading strategy is that we need to see the stock price moving into overbought territory. Any swing trading strategy that works should have this element incorporated.
2. Gap and Go Swing Trading Strategy
The gap and go strategy is typically a day trading strategy where day traders trade stocks gapping up or down significantly on high relative volume. The intraday volatility is the highest if the gap is caused by major earnings or company news. On the other hand, mergers and acquisitions news most often lead to gaps but not to volatility after the open since usually the exact price per share for the M&A deal was already announced.
But the setup also works pretty well swing trading the stock market. Major positive news often causes big up gaps, and traders tend to wait until the upgap gets filled. However, in some cases, the news is that positive that the whole company outlook changed and people just don’t stop buying.
3. Fibonacci Retracement
This strategy can be used by traders to find out the support and resistance points in the market.
This may help them to find trend reversal opportunities in the stock market and formulate their trading strategies accordingly. 61.8 percent, 38.2 percent, and 23.6 percent Fibonacci retracement levels are seen to be probable reversal levels. When the price is in a downward trend and appears to find support at the 61.8 percent retracement level from its previous high, a trader may enter a buy trade.
4. How to Use the Average True Range (ATR) for Stop Loss
To set our stop-loss, we will use the Average True Range (ATR), a standard measure of volatility, that can easily be viewed on charts. A cautious stop will be 100% of the ATR, in pips, above or below the 50 EMA.
More aggressive swing traders may use as little as 50% of ATR, and that’s fine. There’s really no right or wrong figure.
All that really matters is that you stick to the risk and reward ratios set out in your trading plan. For comparison, it’s worth noting that day traders frequently work with stops as tight as 10% ATR.
Additionally, we need to set out stops at odd dollar amounts to avoid institutional stop hunters. For learn more about stop loss in forex trading click here
5. MACD Crossover
It helps in providing the trend directions and reversals to the swing traders in the stock market. It consists of two moving averages — the MACD line and the Signal line. If the MACD line crosses above the signal line and below the zero line, traders should buy the security.
If the MACD line crosses below the signal line and is above the zero line, The trader should sell the security. Before exiting the trade, a stock swing trader would wait for the two lines to cross again, producing a signal for a trade in the other direction.
Here are some benefits of swing trading:
- Swing trading can be a good trading style for people who work during market hours but still want to be active, relatively short-term traders.
- Although overnight risk can be a disadvantage of swing trading, the gaps that sometimes occur overnight can also work in your favor if they gap in the direction of your trade. This allows you to make quick, big, overnight money not available with day trading.
- Swing trading allows you to take more time to analyze the market you’re trading and make trading decisions in a more relaxed manner without the time pressure of day trading.
You can learn more about forex trading at forum.forex
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