When people jump into the stock market, they have different goals in mind.
Some want to slowly grow their wealth over a long stretch, while others aim for quick profits – and a few want a mix of both. Among the various ways to trade stocks, swing trading is the easiest one for beginners to get into.
In this blog, you will learn about swing trading, how to swing trade, what it is, how it works, swing trading strategies, and get answers to common questions on swing trading.
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1. What Is Swing Trading?
Swing trading is a speculative trading style that focuses on taking smaller but frequent gains and cutting losses as quickly as possible.
Swing traders don’t trade within the same day. They aim to profit from short-term moves of longer-term trends while maintaining strict targets and stop-loss levels.
They earn small profits by capturing quick price movements, often referred to as "swings," in the market. When done consistently, these gains accumulate to create an appealing annual return over time.
Swing traders use technical analysis to pinpoint when to buy or sell. They face gap risk, which is when the price of an asset changes while the market is closed.
2. How Does Swing Trading Work?
Swing traders analyse patterns to decide when to buy or sell stocks, aiming to benefit from the securities' price shifts and momentum trends.
They rely on various technical indicators and charts to get market insights and analyse market psychology and multi-day patterns to determine the probable stock price direction and find trading opportunities.
The swing trader identifies profitable times to enter trades based on two swing types: swing low and swing high. A swing low refers to a major price low, while a swing high highlights a major price high.
The trader tries to capture the price movements between major highs and lows. When a stock is in an uptrend, a trader looks to place a long/buy trade from these lows and exit the trade at the swing highs.
When the stock is in a downtrend, traders look to place a sell/short trade from the highs to the lows.
3. Should A Beginner Do Swing Trading?
Swing trading is beneficial for both beginners and advanced traders. It is a simple and beginner-friendly trading form that most working professionals use. When starting, you need to put in some time to find the right swing trading that suits your goals.
A basic understanding of trading patterns and charts can help you design your strategy. You can refine it further as you develop more market knowledge. Above all, avoid trading based on random guesswork or emotions.
4. Advantages Of Swing Trading
Swing trading is a popular trading style offering a range of key advantages:
Swing trading is less time-consuming than day trading as they don’t need to monitor the markets and their positions frequently. Swing traders get more time to analyse the markets and work on trading strategies as they need to check their positions periodically.
Swing trading is less stressful and emotionally demanding than other trading strategies.
Trading on a shorter timeframe generates a lot of signals. It makes it difficult to filter out the good signals from the bad ones. Unlike day trading, swing trading requires traders to analyse charts of “higher timeframes”, which makes it less difficult than shorter timeframe charts of 5 minutes.
Swing traders incur lower transaction costs as they place trade less frequently.
Swing traders can benefit from both trend and counter-trend trading.
Other advantages include maximising short-term profit potential and flexibility of capital management.
4. What Are The Disadvantages Of Swing Trading?
Here are a few psychological and financial drawbacks associated with swing trading:
Swing trade positions are subject to weekend and overnight market risks.
Momentum in stocks can propel the stock market up or down in extremes for an extended duration. It can make swing trading more challenging.
Swing traders study chart patterns and statistical trends on a stock chart to find trading opportunities. It makes trading intimidating and risky.
Holding positions overnight makes swing traders more vulnerable to unforeseen events, such as market gaps, sudden market reversals, substantial price fluctuations, etc., that could lead to losses.
Swing traders miss longer-term trends by focusing on short-term market moves.
Holding positions for weeks or months makes them more prone to short-term volatility and the possibility of markets running against them.
Finding the right buy and sell levels can be complicated. It causes traders to alter their stop-loss and profit-taking levels, which takes more time and effort.
As swing traders often trade on higher timeframe charts, they will find fewer trading signals and opportunities.
Keeping positions open for an extended period causes swing traders to doubt their trading strategies and make mistakes.
Though swing traders pay less in commission due to fewer transactions, their swap cost is higher as they mostly hold positions for a longer time. This cost can add up fast if not monitored, adversely impacting the trader´s profit and loss.
5. Which Types of Securities Are Best Suited for Swing Trading?
Various securities are available among the choices for swing traders, but the most promising opportunities often lie within large-cap stocks. Among the most frequently traded stocks on many exchanges, these stocks tend to move between distinct low and high points.
For the swing trader, this means riding the market wave in one direction for several days or weeks and adjusting to the opposite side when the stock changes course.
Moreover, these stocks are especially appealing because they oscillate within well-defined and predictable ranges, presenting short-term and extended trading chances.
6. Steps To Start Swing Trading in Australia
Follow the below steps to place your first swing trade:
Step 1: Open A Trading Account
Look for a reputable and licenced brokerage that offers a trading platform with technical charting capabilities and real-time quotes.
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Step 2: Educate Yourself
Before you begin, educate yourself about the markets and the commonly used swing trading strategies and indicators. Books, swing trading courses, tutorials, and articles can help you learn more about swing trading.
Step 3: Develop a Swing Trading Strategy
You need a trading strategy to find trading opportunities. You can use several technical indicators, such as moving averages, RSI, etc., to find trading patterns, trend direction and potential short-term trend changes.
Step 4: Find The Right Securities To Trade
You can do swing trading across various asset classes, including forex, commodities, bonds, stocks, crypto, etc. Choose an asset class with a certain degree of volatility, as there is no point in trading an asset often stuck in a tight range.
Step 5: Watch on The Economic and Earning Calendar
As swing traders hold positions overnight or over the weekend, it's crucial to keep an eye on the country's overall economic situation and potential trading chances or risks that might appear ahead.
Furthermore, pay attention to the earning calendar. This will assist you in considering unforeseen price shifts as you shape your swing trading approach.
Step 6: Do Market Analysis
Technical analysis forms the basis of swing trading.
Most swing traders use indicators such as simple moving average (SMA), stochastic oscillator, commodity channel index (CCI), a chart pattern (such as a trendline), and the relative strength index (RSI) to find potential entry points.
Step 7: Start Swing Trading
Once you have adequate market knowledge and a proper swing trading strategy, start trading with a demo account. It is a good idea to familiarise yourself with live markets and try your strategies without risking your real money.
After getting confident executing swing trades, you can place trades with real money and accrue profits. Using limit orders is a useful option when you lack time to observe market action actively and manually execute the trade.
Start with a small capital in the initial trading days and only invest what you don’t mind losing. Slowly increase your trading capital as you gain experience and confidence.
You also need sound risk management to deal with the risks of keeping positions running longer. As markets can change fast, traders must regularly adjust their stop-loss and take-profit levels or exit from the position early.
Step 8: Analyse Past Performance
Keeping a trading journal and assessing past trading performance is a good practice. It will help you identify mistakes and ensure that your present trading strategy will be appropriate to use in the future.
Furthermore, stay updated on the national and global market conditions, earnings calendar, etc., to make timely changes in your trading strategies, identify new trading opportunities and guard against potential risks.
7. How To Become A Profitable Swing Trader
Here some tips to help you become a profitable swing trader:
Establish achievable swing trading goals by identifying high-probability trade opportunities that align with your trading strategy, then consistently stick to them.
Stay patient, as swing trades take longer to form and develop.
Manage your trades ahead of key market-moving events such as central bank meetings, company earnings, labour market numbers, etc.
Don’t ignore fundamental analysis; it can trigger strong, long-lasting market trends. It may provide useful clues to anticipate reversals in advance and may provide better entry points.
Incorporate intermarket analysis in your daily swing trading, as it can considerably improve your performance. It also helps find hints about the future direction of your market.
8. The Most Popular Swing Trading Strategies
Successful swing traders deploy several strategies to find potential market swings and profitable entry and exit points. Some of these include:
9. What Is The Best Timeframe For Swing Trading?
There are different swing trading time frames, such as:
Daily time frame
Out of them, the best timeframe is “daily timeframe” for the following reasons:
The lower the time frame, the more random is the price movement. It is due to less buying (or selling) pressure required to move the markets. So, where a day trader analyses a stock on a 5-minute candle, a swing trader uses a daily chart, making it less random than other trading timeframes.
Trading on lower timeframes causes more mental exertion as you must always stay attuned to the markets. Eventually, you tire out faster, and your trading efficiency drops. On the contrary, trading on daily time frames gives you more time to make decisions. So you feel less time pressure and don’t get stressed out and exhausted.
Getting enough time to weigh and act on the day’s events and news leads to reliable and tradable swings and enhances your work-life balance.
It fits the regular market rhythm, helps develop a consistent trading routine, and improves your success chances.
You can avoid the “noise” of a single local trading session and form your trades based on the global macroeconomic environment.
Trading fewer times reduces your trading costs concerning your profit margin. You can use this free time to enhance your trading knowledge and strategies.
10. How Long Does It Take To Learn Swing Trading?
The time it takes to become a swing trader varies based on how quickly you learn and understand, as well as how you're learning—whether it's through free courses or professionally structured programs.
It usually takes about 7-8 months to establish a strong foundation in the stock market and grasp swing trading.
11. Is Swing Trading Harder Than Day Trading?
Both trading forms have their pros and cons. Your trading experience, risk appetite, and trading goals determine the difficulty level of a trading strategy.
Day trading involves trading shares within the same trading day. It is extremely fast-paced and highly speculative, and you can quickly lose money if you don’t trade wisely.
Swing traders are relatively slower as traders don’t trade on the same day. They take short-to-medium-term positions to profit from slight longer-term price movement while keeping strict stop-loss and target levels.
Swing trading doesn’t require much active attention and time commitment. Unlike full-time day traders, swing traders are relieved from the stress of constantly monitoring market movements to place frequent trades. They can manage and trade while maintaining a full-time job.
However, carrying positions for a few days to weeks can expose them to sudden and unexpected market movements that can lead to loss.
Here is a complete list of differences between the two trading styles to help you decide the right one for your needs and goals:
|Factors||Day Trading||Swing Trading|
|Frequency of trades||Multiple trades per day||Multiple trades per week|
|Number of transactions||Several transactions on intra-day basis||Fewer transactions|
|Time needed to trade||Need constant monitoring||You can do it periodically|
|Trading outlet||Specialized trading software||Brokerage account|
|Profit potential||Profits and losses accrue fast||Profit and losses accrue slowly|
12. What Is The Most Successful Swing Trading Strategy?
Successful swing trading can be one or a combination of different strategies when performed with patience and discipline. They can help you correctly identify and capitalise on price changes.
However, each strategy carries risks, so you must carefully assess your trades and manage risk accordingly.
You can find below the pros and cons of successful swing strategies:
Use technical analysis indicators to take advantage of established market trends.
There is a high possibility for steady gains when a solid trend is found
Provides clear stop prices and exit levels on the trend reversals
Easy for beginners to comprehend and implement
Late entries can lessen profit margins
Traders make gains from price movements when the stock breaks through set resistance or support levels on price charts.
There is a high possibility for considerable profits during strong momentum
Provides clear entry and exit levels based on technical levels
Trades have solid market validation
You require continuous monitoring of price action
You need tight risk management, as false breakouts could lead to losses
Intense competition as most traders look for similar breakout levels
Traders buy the stocks at dips and ride the bounce in a trending market.
Lower-risk trade setups due to trend trading
Traders can easily find optimised entry points
Provides decent risk-reward ratios
You need a detailed understanding of support and resistance
Finding the end of a pullback is difficult
Traders may mistake a trend reversal for a pullback
You use technical indicators like the relative strength index and moving average convergence/divergence (MACD) to identify stock momentum and profit from correct trade entry and exit point assessments.
Get a clear trading edge during strong momentum
Possibility to make fast profits in shorter time frames
High trade volume signals trend confirmation
You need to be quick in forming and executing decisions
Highly prone to sudden reversals in the market
Requires more screen time and focus
Bollinger Bands and other statistical tools use price movements after extreme divergences.
It follows the basic market theory that asset prices stabilize over time
The strategy uses time-tested statistical tools for identification
Traders benefit from overextended price movements that generate high returns
You need to identify the “mean” or historical average precisely
News or external events can disrupt the expected return to the mean
The strategy can result in extended holding times if the asset price fails to revert as expected
The traders benefit from price movements due to news or events influencing a stock.
Traders can make considerable profits if they interpret news correctly and act upon it fast
It makes entry and exit levels more visible
Traders can leverage market movement to their advantage
Unexpected market reactions to news can result in higher risks
Requires strict monitoring and acting upon breaking news
If news is already “priced in,” the stock may follow an opposite movement than expected
13. Frequently Asked Questions (FAQs)
Is Swing Trading Risky?
Swing trading carries risks as the trader analyses past trading activity and price movements to predict future price movements.
Furthermore, swing traders are exposed to gap risk, where a security’s price falls or rises substantially based on events or news when the market is closed, i.e., during a weekend or overnight.
The longer the market stays closed, the greater the risk. When the market opens, the opening stock price can cause shock due to any unexpected news.
Additionally, sudden changes in the market’s direction can pose a risk to the trader. Also, focusing on shorter holding periods may cause swing traders to miss out on longer-term trends.
Is Swing Trading Difficult?
There are a few things that can make swing trading difficult:
Is Swing Trading Profitable?
Swing trading can be a consistently profitable trading style. It can yield attractive profits to traders with patience and a well-defined, rules-based trading strategy.
Unlike day traders, swing traders run their trades for some days to months; a strong understanding can play a crucial role in the performance of the trades.
How Much Money Do You Need To Be A Swing Trader?
You don’t need any minimum amount to start swing trading in Australia.
However, as it involves holding positions for longer timeframes, like weeks or months, a trader could require a certain amount to meet margin requirements.
How Long Should You Hold a Swing Trade?
Your swing trade duration depends on your trading goals and desired profits. You may hold your positions for a few weeks to several months or, in some cases, even years.
Is Swing Trading Stressful?
Like any other trading form, swing trading also involves a bit of stress. Here are the common stressors in this trading style:
You must constantly monitor price fluctuations that can make or break your trades.
Quick price movements can put you on a rollercoaster of emotions and test your resilience.
You must constantly guard your judgement against greed and fear and avoid making impulsive decisions.
You must always stay vigilant to oversee the market closely, analyse charts, and make timely decisions. All of this can cause stress in them.
Is A 5% Return on a Swing Trade Good?
A 5% return on a swing trade can be considered good. However, you should evaluate the profitability of your trade on several factors, such as:
Individual trading strategy and objectives
Market benchmarks (average or outstanding performance levels in swing trading)
A 5% return may seem small initially, but it could gradually lead to big returns over time. Keep progressing, and let your profits soar.
Why Do Most Swing Traders Fail?
The main reason behind failure in swing trading is the extremely dynamic nature of markets that brings in an element of randomness. It may create profits for unskilled traders and losses for skilled traders.
Novices may get a false sense of ability due to past positive outcomes by chance alone. On the other hand, suffering losses due to randomness could cause a skilled trader to doubt his ability and reject a tried and tested strategy.
The only way to get away with it is to have a trading plan and risk a small portion of your capital on every trade. This way, randomness becomes less of a factor, and you can get clarity on how your trading strategy performs over time.
Accept that even the best traders and trading methods face losses, but that doesn’t mean you must remove your faith in your tested strategy.
Instead, trade with less capital and find reasons that are causing your trading strategy to go wrong. It will help minimise your losses when similar conditions reoccur.
What Is The Simplest Swing Trading Strategy?
You can’t name one, as there are several simple swing trading strategies, such as breakout strategies, momentum systems and support and resistance approaches.
What Are The Most Common Swing Trading Mistakes?
The following are a few common mistakes that swing traders make while trading:
Frequently watching the market too closely. It can be damaging to your psychological and financial health.
Placing several small trades with little thought can reduce your overall profitability.
Getting swayed by stock’s fundamentals and placing event-based reactionary trades
Lacking discipline and patience that can lead to making hasty decisions.
Focusing solely on profits without proper risk management
Trying to predict tops and bottoms in the market
Trying to find a system that predicts trades that suit your objective and temperament with almost 100% accuracy.
How Long Does It Take To Make Consistent Money From Swing Trading?
Trading full-time with a mentor takes 6 to 12 months to make steady gains from swing trading.
Part-time learners can expect to spend at least a year before making money trading assets using swing trading.
To learn fast, make sure you put in full-time hours, five days a week, practising, evaluating trades, and thinking about ways to improve.
How Much Does The Average Swing Trader Make?
With only a 2% average profit in a month, a swing trader can expect to make an average annual return of 24%. (no guarantee)
What Percentage of Swing Traders Make Money?
The average success rate in swing trading is around 10%. It means only 10% of swing traders profit in a year.
Swing trading is a good way for beginner traders to get their feet wet in the market with minimal trading capital.
The best thing about this trading strategy is that it doesn’t require the same level of active attention as day trading, so the swing trader can begin slowly and develop the number of trades over time.
However, to be successful, you require a consistent process rather than a few big wins. By spending time researching stocks and understanding technical analysis, swing trading can help you accumulate attractive profits, slowly but steadily, over time.
|The advice and information on OzStudies.com is in general nature and should not be seen as a replacement for independent financial advice. We strongly encourage readers to consult with financial experts regarding their own financial decisions and investments.
Please note that the information presented on OzStudies.com is solely for educational purposes. Every individual's financial situation is unique, and the products and services we mention may not suit everyone. We do not provide financial advice, advisory, or brokerage services nor endorse buying or selling specific stocks or securities. It's essential to know that information might have changed since publication and past performance does not guarantee future results.
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