Know About Swing Trading Strategies

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Swing trading is a speculative trading strategy in the financial markets wherein a security is held for one or more days so that investors can profit from the price fluctuation or the “swings.” Since the traders typically hold their position for a couple of days to a few months, these strategies are best for investors seeking to exploit benefits in the short-term horizon.

The best swing trading strategy can significantly affect your profits and losses. These strategies aim at delivering consistent returns in the stock markets using risk management tools, technical indicators, online charts and price patterns. Presenting to you a detailed study of various swing trading strategies India and how they can help maximise your profits.

Why Swing Trade?

The swing trading strategies focus on making profits by exploiting smaller gains in the short term and cutting losses quicker. As you keep booking small profits, these get compounded into excellent returns over a while. It is crucial for traders to have a background in fundamental and technical stock analysis to learn swing trading.

What Is A Swing Trading Strategy?

Swing trading India uses popular trading tools to identify entry and exit points from daily, hourly and weekly chart patterns. They may look for various trends such as a flag pattern, head and shoulders pattern, triangle pattern or a cup and handle pattern. Let us understand the different swing trading strategies in detail along with some swing trading tips.

  1. Support and Resistance - Support and resistance trading levels are two critical indicators that define a price trend. The support level is the bottom-most level of an ongoing trend, and prices are not expected to go any lower from this level. On the other hand, the resistance level defines the peak of a current trend. The security price is said to have achieved its maximum value for the current trend as it touches the resistance. As security prices breach either of these levels, it may signal a trend reversal.

    If the security's price exceeds the resistance level, it suggests that the security is overbought. In such situations, the buying pressure recedes over time, and the selling pressure deepens. Similarly, as a security's price breaches the support level, it must be oversold.

    Entry and exit points
    Swing traders constantly monitor the support and resistance levels. They would enter into selling positions just as a security price falls off the resistance level and set a stop-loss a notch above the line.
  2. Simple Moving Averages (SMA) - The SMA line on the security charts gets updated constantly, where each data point on the line represents the security's average price. Traders can use multiple SMA lines to analyse price trends, such as for ten and twenty days.

    Entry and exit points
    When the 10-day SMA crosses over the 20-day SMA, this signals a bullish trend and traders plan entry. Conversely, when the reverse occurs, i.e. the 20-day SMA crosses over the 10-day SMA, it sends a sell signal.
  3. Moving Average Convergence/Divergence (MACD) Crossover - The MACD crossover is used to identify the current trend's strength or a likely reversal. The MACD displays the difference between a fast and slow exponential-moving average. The 12- and 26-day lines are typically taken to determine the MACD lines. The 9-day EMA line on the MACD denotes the signal line.

    Entry and exit points
    When MACD crosses above the signal line, it indicates a buy position. Conversely, a sell signal is generated when the MACD crosses below the signal line.
  4. Bollinger Bands - Bollinger bands are price bands on both sides of a moving average trend line. These create a range between which the security prices fluctuate. Traders can assess the current price trends of specific securities using this technique. Bollinger bands, therefore, help traders analyse different levels of highs and lows that a particular security has attained over a period. The bandwidth formed widens and narrows from changes in volatility. The band would widen in terms of high volatility and vice versa.

    Entry and exit points
    Bollinger bands along with other technical analysis tools can be used to determine entry and exit points. The relative strength index (RSI) is an excellent momentum indicator widely used among traders. RSI above 70 signals overbought conditions, and below 70 suggests oversold conditions. Assuming the price touches the upper Bollinger band and RSI is below 70, it indicates that the trend is likely to continue. However, let us consider the security price reaches the upper Bollinger band, and RSI is greater than 70; this indicates the possibility of a trend reversal, and the security price may start declining.
  5. Channel Trading - Channel trading involves trading securities whose prices run within a specific channel. The channel represents two lines which act as support and resistance for the current range of security prices. This technique helps plan trades where a trend is expected to continue. An upward direction of the channel indicates a bullish channel, and a downward direction implies a bearish channel.

    Entry and exit points
    Suppose the technical charts show the formation of a bearish channel. A trader would find the exit points just when the security price hits the resistance line and is about to bounce off again in the downward direction. Similarly, traders would consider entry points close to the support line in case of bullish channels.
  6. Fibonacci Retracement - Fibonacci retracement is widely used among traders to determine a security's support and resistance levels. The technique is based on the assumption that security prices tend to backtrack before they continue moving in the direction of the current trend. For instance, let us assume a security's price has increased from Rs. 100 to Rs. 200; there is a possibility that the price backtracks a bit - let us presume until Rs. 160 and then rise again until Rs. 250. Fibonacci ratios - 23.6%, 38.2% and 61.8% depict the levels until security can retrace its path. Traders draw horizontal lines against these levels on the technical charts to determine the potential reversal levels.

    Entry and exit points
    Suppose the security exhibits a bearish trend. The trader can plan a short trade at the Fibonacci line corresponding to a 61.8% level, the resistance level where the securities will retrace their path before falling again. The trader might fix the exit point when the price touches the support level, i.e. the 23.6% Fibonacci line.

What Are The Advantages Of Using Swing Trading Strategies?

  1. Swing trading can magnify profits for a trader by exploiting multiple small profit-making opportunities. The strategies also help eliminate intraday trading noise and help traders focus on more significant trades.
  2. Swing trading strategies are based on technical chart analysis that gives a reliable measure of future price movements. Traders can use these strategies to make more efficient decisions.
  3. Traders using swing trading strategies may not have to monitor the markets constantly.

Swing Trading vs Day Trading

Swing and Day Trading techniques are among the most efficient strategies a trader uses to enhance stock market returns. The primary element that differentiates swing from day trading is the time horizon. While day traders initiate and close their positions on the same day, swing traders may look to make a profit from short-term trends. Swing traders may therefore retain their positions for a few days, going up to a few weeks or even more. Day trading requires monitoring the markets and making quick decisions based on their analyses. Another critical element between these two trading styles is the leverage – the leverage for swing trading is 2x, while that for intraday trading is 4x the initial investment.

Selecting a strategy might vary across traders, their requirements, availability and risk appetite. Since the positions are left open overnight in swing trading, it possesses a particular risk element. However, since positions remain open for an extended time in swing trading, it gives traders a greater chance to make profits. Moreover, the margin requirement in swing trading is higher than in intraday trades.

Swing Trading and CAN SLIM

CAN SLIM is a trading strategy used in bullish markets that attempts to identify stocks with high-growth potential. The most critical aspect of a CAN SLIM strategy is that it considers both fundamental and technical stock analysis. Although the CAN SLIM strategy is applicable for more extended periods, the rules are still applicable for swing trading. Let us understand how.

  1. Use consolidations to take breakouts.
  2. It is essential to have a prior uptrend.
  3. Sideway action that does not give away much ground is preferred.
  4. Look for high relative strength ratings. These are the most critical statistics to limit your universe to the best prospects.
  5. Monitor the volume. This helps in confirming that institutions are accumulating shares.
  6. You may be seeking to find consolidations that typically range from five to seven weeks. However, with swing trading, you must look for half that period or even less.

Lower profit goals compensate for the flexibility in the time frames. For instance, an uptrend of more than 30-40% may need a longer timeframe. If you seek to book profits at 5-10%, you may not require such extended timeframes. Similarly, the volume characteristics of a breakout also have a shortened time frame. You might not be looking for 50-day moving averages to find consolidations. The breakout volume exceeding recent trends may be a sufficient indicator to confirm strength.

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