swing trading for dummiesSwing trading has been gaining popularity as people look for ways to bring in extra income while working their full time job. Due to the rise of the internet and online trading houses, it has never been easier to start trading. However, it is still a business, so you have to stick to certain rules designed to keep you in the game. What is a swing trading strategy in particular? Is it alright for beginners? You’ll find out below.

Swing trading for dummies – swing trading definition

Swing trading has been described as a kind of fundamental trading in which positions are held for longer than a single day. Most fundamentalists are swing traders since changes in corporate fundamentals generally require several days or even a week to cause sufficient price movement to render a reasonable profit.

However, this definition of swing trading is a simplification. In reality, swing trading sits in the middle of the continuum between day trading to trend trading. A day trader will hold a stock anywhere from a few seconds to a few hours but never more than a day. A trend investor examines the long-term fundamental trends of a stock or index and may hold the stock for a few weeks or months. Swing traders hold a particular stock for a period of time, generally a few days to two or three weeks, which is between those extremes, and they will trade the stock on the basis of its intra-week or intra-month oscillations between optimism and pessimism.

So, swing trading is an active strategy that captures the swings in market sentiment and allows you to enter and exit at key levels. The objective is to capitalise on a greater price shift than is possible in an intraday time frame. But because you follow a larger price range and shift, you need calculated position sizing so you can decrease downside risk. To do this, individuals call on technical analysis to identify instruments with short-term price momentum. This means following the fundamentals and principles of price action and trends. Swing trading setups and methods are usually undertaken by individuals rather than big institutions. This is because large enterprises usually trade in sizes too great to enter and exit securities swiftly.

Swing trading for dummies – swing trading basics

As we already know the swing trading meaning, let’s move on to basic principles. Swing trading can be applied across a wide range of products and markets, including but not limited to forex, commodities, futures contracts, stocks and exchange-traded funds (ETFs). Traders engaging in swing trading will seek to identify ‘swings’, which are detectable directional shifts in the short and medium term. Then, they enter in and out of trades as appropriate once they’re sure there’s a reasonable chance of making a profit. In uptrends, swing traders will look to buy at swing lows, so they can purchase cheap securities and make a profit once the price returns to a higher level, whilst selling at swing highs to capitalise on the newly inflated asking prices. Essentially, swing trading means trying to catch points when the product is either overbought or oversold.

Because of this, swing traders will often rely on technical indicators to alert them to emerging trends. These include moving averages, stochastic oscillators and relative strength indexes.

Why is swing trading strategy so unique?

Due to a slower paced endeavour than day trading or scalping, the swing trading style is more well-suited for individuals who perhaps don’t have the time or means to continuously monitor market charts throughout the day. With swing trading, you can simply spend some time picking your target instruments with a ‘less is more’ approach and assess daily movements in their markets on an evening by looking online or watching the news. For this reason, it’s perfect for those hobby traders who have other full-time commitments such as university students or 9-5 workers.

However, it’s important to consider the other side of the coin. Swap charges need to be taken into account more carefully when swing trading, as if you’re going to be holding positions open for several days (or even weeks) on end they can have a considerable impact on your profit margins; larger stop losses are also a must in order to help you weather volatility within the market.

Swing trading for dummies – swing trading stocks

The first key to success is to pick the right swing trading stocks for beginners. The best candidates are large-cap stocks, which are among the most actively traded stocks on the major exchanges. In an active market, these stocks will swing between broadly defined high and low extremes, and the swing trader will ride the wave in one direction for a couple of days or weeks only to switch to the opposite side of the trade when the stock reverses direction.

Another key aspect of swing trading methods and strategies is choosing the right market. In either of the two market extremes, the bear market environment or raging bull market, swing trading proves to be a rather different challenge than in a market between these two extremes. In a bear market or bull market, momentum will generally carry stocks for a long period of time in one direction only, thereby confirming that the best strategy is to trade on the basis of the longer-term directional trend.

The swing trading, therefore, works best when markets are in a consolidation phase. If indexes rise for a couple of days, then decline for the next few days, only to repeat the same general pattern again and again, it’s the perfect pattern for swing traders. A couple of months might pass with major stocks and indexes roughly at the same place as their original levels, but the swing trader has had many opportunities to catch the short-term movements up and down, sometimes within the channel.

Of course, the problem with both swing trading and long-term trend trading is that success is based on correctly identifying what type of market is currently being experienced.

Swing trading for beginners – is it a good choice?

Swing trading is actually the best trading style for the beginning trader to get his or her feet wet, but it still offers significant profit potential for intermediate and advanced traders. Swing traders receive sufficient feedback on their trades after a couple of days to keep them motivated, but their long and short positions of several days are of the duration that does not lead to distraction. It’s also perfect for individuals who don’t have the time to continuously monitor market charts throughout the day, such as university students or 9-5 workers.