So what is Swing Trading? It is a trading activity in the stock and futures market where a trader buys or sells an asset and it is held for one day to a few weeks in an effort to profit from price changes or ‘swings’ in the market.
A swing trading position is normally held mush longer than a position when day trading, however it is shorter than buy and hold investment techniques that will usually be held for many months or even years. Profits are gained by either buying an asset or short selling.
Various Swing Trading Techniques
Using a set of rule based objective method for buying and selling assets for swing traders seek to reduce the subjectivity, emotional aspects of swing trading. The trading rules can be used to create a trading system using technical analysis to give buy and sell signals.
A simple rule-based trading approaches may include a strategy like Alexander Elder’s uses, which measures the behavior of an assets price trend using three different moving averages of prices. The stock or commodity is only bought when the three moving averages are aligned in an upward direction, and only sold short when the three moving averages are trending downward.
Everyone is building more sophisticated methods and the problem is that the more competition exists using the same method, the smaller the profits.
So figuring out when to enter and exit a market is the primary problem for all swing trading strategies. The good news is, swing traders don’t need perfect timing.
You dont have to buy the very bottom or sell the very top of price movements to make profits. A swing trader can make small consistent winnings that involve strict money management rules and will compound profits over time.
Swing traders understand that technical analysis methods and algorithms do not work for every asset or market condition.
Risks of Swing Trading
There are risks of course in swing trading, even though they can be kept to a minimum with proper money and trade management. The primary tool for the swing trader in keeping risks to a minimum is the use of stops. Stops are put in the market the moment a trade is taken. This will eliminate of the traders greatest problems, emotion.
By putting in the stop immediately, emotion is taken out of the equation and the trader know exactly how much he or she is risking on the trade. The trader should also know exactly where they will get out of the trade if it goes in their intended direction.
So the trader will usually have a 3-1 risk reward minimum on a trade. In other words the trade should make 3 times as much as it would potentially lose. So assuming the trader thinks xyz stock will go from 10 to 16 dollars, they would only risk 2 dollars.
So if they bought 100 shares of stock the would hope to make $600 while risking only $200. This is swing trading in a nutshell.
When a trader swing trades he hopes to make a significant higher percentage on his money than simple buy and hold investing. There are many people who say it cant be done but there are many people who do make a living at it so it can be done!