Simply put, swing trading is one of many basic trading techniques in which trades are held for more than one day. Most investors are swing traders, as elemental changes in the corporate world usually take multiple days to cause significant price changes and create opportunities for profit. However, this description of swing trading is rather theoretical and simplistic. In practice, swing trading lies somewhere on the gamut of day and trend trading.
Day trading and trend trading are polar opposites; day traders hold on to stocks anywhere between a few seconds to less than 24 hours, while trend traders hold on to stocks for several weeks to a few months, as they examine long-term trends. Swing traders, on the other hand, hold on to stocks between a few days to three weeks. To help you get started, we’ve put together a brief overview of what swing trading is and how it works.
Right Stocks and Market
To become a successful stock trader, you must choose the right stock for the type of trade that you want to make. Large-cap stocks, one of the most actively traded stocks on the major exchanges, are generally the most suitable stocks for swing trading. When the market is active, large-cap stocks will ‘swing’ among the extreme highs and lows. This allows a trader to hold on to the stock as it takes a dive for a few days, only to watch it swing to the top.
There are two extremes of a market: the bear market and the raging bull market. In these market extremes, stocks, even the most active ones, will not demonstrate the same fluctuations as they usually would when listings are somewhat stable for a couple of weeks or months. In either market, stocks can be inclined toward only one direction for a long period of time, forcing traders to follow a longer-term strategy and trends.
Ideally, swing traders perform their best when the market and its listings carry out their normal fluctuations. Although some stocks and listings may be stuck in their original levels for quite some time, swing traders may have the opportunity to seize the short-term up and down movements.
Exponential Moving Average
Simple Moving Averages calculate the average of a specific range of prices (normally the closing price) by the number of the periods in that range. This provides traders with resistance and support levels, allowing them to decide whether or not to buy a stock. It also offers bear and raging bull market patterns, signaling price points where stocks should be entered and exited.
A variation that underlines the latest data points would be the Exponential Moving Average. They are more precise than Simple Moving Averages as they offer clearer trend signals and faster entry and exit points. When the prices move above the Exponential Moving Average, this suggests that a raging bull market crossover is in place. If they fall below the Exponential Moving Average, then a bear market crossover occurs.
Baseline Levels
Swing traders use the Exponential Moving Average to identify the baseline levels on a stock chart. Liquid stocks usually move above and below baseline levels in a thriving market. Baseline levels show price fluctuations that indicate the best time for traders to indulge in long-term or short-term trading; long-term trading entails holding on to the stock for an extended period as long as its price is increasing, whereas short-term trading involves selling the stock quickly when its price starts dropping.
Swing trading is not for people who want to hit the jackpot with one trade. Stock traders do not focus on the exact perfect timing to buy and sell stocks at their lowest and highest levels. Instead, they wait for the stocks to hit the baseline so they can determine what to do next to maximize their gains and minimize their losses.
Profits
Unfortunately, when it comes to seizing profits, swing traders may be at the risk of missing the best opportunity. This is because swing traders want to exit the trade as close as possible to the upper or lower channel line when it’s time to take profits. This is easier done in strong markets where traders can wait for stocks to reach the channel line before exiting the trade. In weak markets, however, traders may have to take the profits before the stocks meet the channel line, in case the direction of the stocks changes suddenly.
Swing trading is the perfect style of trading for any investor, no matter their level of expertise. It is a good way to get beginner traders started in the world of trading, and it provides numerous opportunities for experienced traders to make profits. By investing in the right stocks and seizing the right opportunities in a thriving market, swing traders can become very successful.
