A Complete Guideline on Swing Trading
Swing trading is a trading method that is used for capturing gains in a particular stock or any other financial instrument. It can either be used within a specific pattern of overnight hold or can also last for several weeks. Swing traders use the method of technical analysis for finding stocks within a momentum of short-term price. The traders might either utilize the fundamental value or the intrinsic one in stocks for analyzing the trends in price and the various patterns.
The individual responsible for trading should be able to make quick decisions while also figuring out the stocks that have an exceptional potential of moving in such a relatively shorter time frame. Due to this reason, swing trading is primarily used by the day traders who prefer home based trading. The relatively larger institutions trade in much bigger sizes and while doing this they also fluctuate in their trading patterns by moving in and out with regard to stocks and that too very quickly. An individual trader, however, will have the opportunity of exploiting these short term movements of stocks without having to face the competition of leading traders. So the basic idea of swing trading is to hold a position either on a short term basis, on overnight or for several weeks. The final goal here would be to get larger moves in price than it is usually possible on the basis of intra-day.
Advantages of Swing Trading
Lesser stop losses: Yes. In swing trading, you are likely to encounter relatively lesser stalk loss than the long term trades. While the stop losses of swing trade on a four hour chart is likely to be 100 pips, the stop losses on a weekly chart from the overall trend might end up being 400 pips. Lesser stop losses give you the chance of placing the relatively larger position rather than focusing on the lowly leveraged ones.
Lets you control your trade with the natural movement of the markets – One of the primary benefits of swing trading is simply the fact that it lets you control your trade along with the natural movement of the markets. Almost every financial market never follows a specific direction forever, so by being able to manipulate that, you get a chance of increasing your returns. You will get the chance of increasing your returns because theoretically you are likely to make money only when the market rates are higher over the next couple days and then make some profits again when the market is pulled back.
Better opportunities – Now that you can independently trade without being controlled by the market movement, you are also likely to find greater opportunities. As you are in and out of the particular market for a couple of days, you get a chance of collecting profits, identifying the other potential markets and also set up trades at the same time. You get a chance to spread the potential risk and also keep you less tied to one specific capital.
You are aware of your boundaries – A swing trader is usually a more technical trader. They are aware of when the trade is working for them and when it is actually working against them. As a result, they can easily control bad trades.
Disadvantages of Swing Trading
Greater risks – As a swing trader you are likely to encounter relatively more risks than usual, for just because the current market is showing their resistance or inclination for the trade at a particular area, it does not necessarily translate to the fact that they are respecting it right now.
You are required to be well acquainted with technical analysis- While this is not really a disadvantage, yet it does indicate greater work.
Requires greater confidence – As this trade involves a lot more risk than the conventional ones, it also requires greater confidence on the part of the trader.
Is Swing Trading for Everyone
To be honest, swing trading is not really for everyone. This trade requires more technical knowledge, so you can partake in it, only if you are acquainted with the technicalities of swing and Forex trading. At the same time, it also requires you to be all the more confident and upfront as the trade involves greater risks.
Basic Swing Trading Strategies
One of the primary basics of swing trading strategy is to target a relatively modest amount of stocks. This means, instead of targeting 20% or 25%, it would be much better if you target 10% or even 5%. Although these profits might not appear to be any life changing reward, yet this is exactly where time comes to play.
As a swing trader, your focus should not be on the gains that are likely to develop over several months or weeks because the average length of your trade is hardly five to ten days. Following this strategy, you can make several smaller gains which can eventually add up to result in greater overall returns. Also, while taking the losses it is highly recommended that you take them at two to three percent as it would minimize the losses in the long run.