“The trend is your friend until the end when it bends.” How many of you have heard this quote? Those who already have, then we are sure that they must already have heard about swing trading too, and those you haven’t, don’t worry! We will decode it for you.
For starters, swing trading is a trading style that helps us to capture short to medium-term gains for a period of a few weeks in any stock or financial instruments. Swing traders usually use technical analysis for picking up stocks for swing trading!
But wait! Swing trading shouldn’t be confused with day trading. The main difference between day trading and swing trading is the holding time. Yes! The positions in day trading are closed within the day, whereas the positions in swing trading can be carried forward and held for a few weeks to a month.
Having understood what swing trading means, in today’s blog, we will discuss the five main factors that one should consider for swing trading are:
1. Finding the Right Swing Trading Strategy by Vishal Mehta
2. Path-Breaking Golden Swing by Souradeep Dey
Also, watch our video on Swing Trading
1. Breakouts
As discussed above, swing trading refers to trading with the trend. Thus, the breakout from a range, chart pattern, important resistance and support zones, or reversal candlestick patterns are some technical tools that swing traders should pay attention to.
For example, from the weekly chart below of Tata Motors Ltd, one can see a double Bottom formation after a downtrend. Double Bottom is a bullish reversal chart pattern that indicates the stock may reverse to up.
swing trading
We can see from the above chart that after the breakout from the double bottom chart formation, traders can enter the trade for swing trading and continue until the price objective of the pattern reaches, or the trend ends. However, one should note that the traders should only enter the trader after the breakout, which is confirmed by the volume as shown in the above chart. Thus, swing traders should look out for the breakouts in the stocks for entering a position in the same.
Buy why volume is so crucial for selecting stocks for swing trading. Well, let us discuss this:
2. Volume
Volume is an essential tool for swing traders as it helps them analyze the strength of a new trend. The main reason behind this is that a trend with high volume will be stronger than one with weak volume. In addition, more traders buying or selling gives a better basis for the price action.
The above chart shows that volume is mainly helpful as a part of a breakout strategy. However, breakouts tend to follow a period of consolidation or a chart pattern usually accompanied by low volume; volume spikes when the breakout takes place. Traders can also use volume indicators for analyzing the volume in the stock.
3. Liquidity
One of the most basic rules for swing trading is that traders should only trade liquid stocks. Of course, the daily minimum you select is arbitrary, but the most helpful example is 500,000 shares per day.
This is because one can exit high liquidity stocks quickly and with less risk of a loss from the bid-ask spread. More liquid stocks generally show lower bid-ask spreads. One should note that recognizing a bad trade or potential loss requires discipline that is one of the main tenets of swing trading. Thus, swing traders can quickly exit a trade when stocks are liquid.
4. Relative Strength
One should select those stocks that are relatively stronger than the sector or the index for swing trading. This measure helps us identify both the strongest and the weakest securities or any asset classes within the financial market. Usually, the stocks which display strong or weak RS over a given period tend to continue going forward.
5. Volatility
Volatility is one of the major factors for selecting stocks for swing trading. Volatility helps us to measure how much the stock price will move. Traders can use volatility indicators such as Bollinger bands or ATR to gauge how volatile the stock is. Swing traders should select those stocks for trading that are volatile. Large moves are generated by volatile stocks and give us a reasonable window for stops and profits.
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