Swing trading is where investors hold the investment for more than one trading day. This strategy generally needs several trading days to witness the expected price movement and earn a reasonable trading profit.
There is a primary difference between a day-trader, long-term trader, and a swing trader.
A swing trader holds investments for more than one day to earn profits, unlike day traders. Likewise, a swing trader does not own the investment for a long duration like a trend trader.
Swing traders earn a profit based on intra-month or intra-week oscillations, swinging between pessimism and optimism.
If you wish to try swing trading to maximize your profits, bear in mind the following when selecting stocks.
Pick The Right Stock For Swing Trading
For a swing trading strategy to work its magic and fetch you large profits, you need to search and correctly choose the right stocks.
You should select large-cap stocks as they are generally actively traded on major stock exchanges and can show price fluctuations in a short duration.
Find The Right Market
As a swing trader, you have a different challenge in a raging bull market, and the bear market as the market lies between two extremes.
In these trends, market movement is in one direction, and strategy is formulated based on long-term directional trends.
You can earn profits as a swing trader when markets move in a particular direction, either upward or downward, for a couple of days and repeat the same pattern.
Since these stock prices typically swing between low and high price extremes, you can take advantage of the ride in one direction for many weeks.
You can take a shift to reverse direction swing when stock prices change its direction.
Leverage The Power Of APIs
Application Programming Interface (API) is a programming code that parses responses, queries data, and sends instructions between two software platforms.
You, as a swing trader, can use a free Stock market api for establishing a bridge between your preferred trading broker platform and a set of automated trading algorithms.
APIs are gaining popularity in automated trading systems, as many brokers give APIs for traders to connect with their screens directly.
You can now connect with the brokerage account for placing orders and sharing real-time stock information.
The Use Of Simple Moving Average (SMA)
The Simple Moving Average (SMA) is always beneficial in choosing stocks and strategies. SMAs provide information about the bullish and bearish patterns, along with support and resistance levels.
Support and resistance levels help in making decisions regarding which stock to buy. Simultaneously, bullish and bearish crossover patterns help decide the appropriate price level to buy and sell shares.
An exponential moving average (EMA) is another SMA variation, emphasizing the latest data points for better decision making. With the help of EMA, you can get better trend signals as well as entry and exit points.
In swing trading, it is crucial to identify the baseline with research on historical data. Once you placed the baseline on the stock chart with EMAs, you can decide the selected stock strategy.
You can head up and short when your stock is near the baseline trending downwards. You might not be able to buy the stock at the perfect time when stock touches the bottom and vice versa.
In a stronger uptrend or downtrend, you should wait till the share touches its baseline and signals its movement in either direction.
It would help if you tried to take out profits when the stock prices reach the upper or lower channel lines without becoming overly precise. Still, you might miss an opportunity to earn maximum profits.
When the market is trending strongly in one direction, the swing trader should keep patience till the stock price hits the channel line.
However, it is preferable to take out profits before reaching the baseline in a weak market. This level might be before the change in direction, and a particular swing is not observed.
Risks And Rewards
There are some advantages and disadvantages of swing trading. Swing traders need to study the technical analysis of stocks, including technical indicators, charts, and how to use these parameters to earn profits.
These factors have a significant impact on profits earned in swing trading.
You can suffer loss in some stocks, irrespective of your experience and knowledge of technical analysis.
It would help if you used a stop-loss strategy for limiting the loss to a certain point. Stop-loss can restrict the loss up to a certain level.
Stop-losses might not be beneficial if your trade is in the opposite direction. If the market opens with a significant gap, in that case, despite stop loss, you can incur heavy losses.
Despite these risk factors, you can earn good returns, ranging between 5 to 10%, in short to medium duration. This return is regarded as much better in other conventional methods of investing.
As the holding period in swing trading is relatively longer, you do not need to search for the right stocks and the appropriate market position on a day-to-day basis.
You can manage your trades with the help of price tickers and brokerage services.
The pros of swing trading are:
- You can earn good returns, ranging between 5 to 10%, in short to medium duration. This return is regarded as much better in other conventional methods of investing.
- As the holding period in swing trading is relatively longer, you do not need to search for the right stocks and the appropriate market position on a day-to-day basis.
- You can manage your trades with the help of price tickers and brokerage services.
The cons of swing trading are:
- You must understand the technical analysis of the stocks like technical indicators, technical charts, and technical parameters for earning profits.
- Even if the stop-loss is used, you are vulnerable to high loss if the market changes its direction.
Swing traders need not continuously monitor trends if the investment is made systematically and strategically. Technical knowledge of the market trends can help you take advantage of swing trading.
With the help of algorithmic trading, you, as a swing trader, can earn profits at a frequency and speed that’s not possible for manual traders.