• HDFC securities
• 07 Feb 2023
• Everything You Need to Know About Swing Trading,Knowledge Centre

The stock market is highly volatile. A successful trader is one who utilizes this market volatility to make profits out of it. Traders use different trading strategies with the help of technical indicators to maximise profits and manage risks. One such type of trading is swing trading. Essentially, swing trading hinges upon the highs and lows in the stock price movement. You can either use the momentum or identify reversal points to leverage such movements to successfully carry out a trade. Continue reading to learn everything you need to about swing trading and how it works.

What is Swing Trading?

As mentioned, the prices of stocks often move up and down in the stock market. These movements or fluctuations in the stock price are called price swings. These price swings can be big enough to bring about a new price level which acts as a movement within a trend. A swing trader will aim to buy a stock when prices fall and sell when they rise.

Thus, a swing trade capitalises on the changes in stock price caused due to either change in a company’s prospects or alternations in investor sentiment. Unlike intraday trading, swing traders can hold their trade and positions for a longer time, even weeks and they use technical analysis to identify short-term opportunities in the market. Additionally, swing traders tend to rely on risk-managements strategies like stop-losses to prevent smaller losses from turning into big ones.

Usually, traders use two kinds of swing trades to try and earn a profit on the basis of price movements. They are as follows:

• Counter trend swing trade:

Here selling and buying take place in resistance or support areas towards the direction of the primary trend.

• Trend following swing trade:

Here, the buying takes place in support and selling takes place in resistance towards the direction of the minor trend.

How Does Swing Trading Work?

Now, let's move on to understanding how the swing trading of stocks works. Usually, a swing trader looks for high volumes and high volatility stocks. The process then followed is as listed below:

Picking a stock:

Traders try to pick a stock that will deliver good returns over the short term, including any security of their preference.

Analysis of the chart:

After picking the stock, traders look at the charts to analyse different metrics to understand its performance history.

Entry and Exit:

Next, traders set up entry and exit points along with determining stop-loss levels to mitigate risks.

Fundamental & Technical Analysis:

An important factor of the swing trading strategy is that it includes fundamental analysis as well technical analysis of the stock. Fundamental analysis helps a swing trader to identify a stock’s intrinsic value and overall market and sectoral condition. It can be used by a swing trader to identify stocks to trade. Meanwhile, a swing trader can use technical analysis to determine the entry and exit points using various technical indicators.

Overall, swing trading is considered to be rather flexible for traders and allows them to adjust their positions and catch profits when possible. Moreover, they can invest both for the short-term as well as medium-term.