What is Swing Trading? Understanding, Advantages and Effective Tactics

The universe of stock is one of the most rewarding ones. Yes, it is true that long term investments tend to provide higher returns as good stocks always go up in price and give regular dividends to the shareholders. But, some professional investors who follow goal-based investing do not put all of their capital in stocks that are meant for long term investments. They allocate a portion of their capital towards stocks that they can sell in the short term and make profits to cover personal expenses or to reinvest.

For these experienced investors, short term investment goals are as important as long term ones as it leaves the investor with more money to invest towards their long term goals. For example, let’s say you want to buy a car worth six lakhs after two years. You have four lakhs in savings and want to borrow the two lakhs from a bank as a loan. In this case, you can invest the four lakhs in good stocks for the short term and see the four lakhs become five or six lakhs in two years time. In this way, you won’t have to take a loan and can save on the interest payments over time, which you can reinvest and make profits.

Although the above idea seems lucrative, it is not as easy as it sounds. As short-term trading can prove to be risky, it demands that you are well versed with the relevant techniques and strategies. If you want to know how you can invest for the short term and make quick profits, this blog details the most widely used strategy called Swing Trading. But before diving into trading strategies, let’s get down to the basics.

What is the share market?

A market where shares are publicly issued and traded is known as a share market. The key difference between share markets and stock market is that the former only allows one to trade shares. The latter allows you to trade in financial instruments such as derivatives, bonds, mutual funds, as well as shares of listed companies.

The key factor is that the basic platform offers trading facilities that companies can use to trade stocks in the stock market. On a stock exchange, one can only buy and sell those stocks that are listed on it. Hence, buyers and sellers meet on the stock market. India’s prime stock exchanges are the National Stock Exchange and the Bombay Stock Exchange.

What is Swing Trading?

Swing Trading is a stock market trading technique that aims to capture short term gains by buying any financial instrument and selling it after several weeks or months. Swing Trading is only for the short term and demands that the investors hold the positions for one-month maximum.

Swing traders generally use technical analysis to identify growth stocks that have the potential to rise in price in the future. Technical analysis is the study of chart patterns, graphs and diagrams on a screen. The idea is to understand price and volume trends and pick stocks accordingly. Technical analysis is based on the premise that historical price trends tend to repeat over time. Hence, Swing Trading includes the process of investing in undervalued stocks that are on the verge of rallying in price.

Furthermore, apart from technical analysis, Swing Trading may include the use of fundamental analysis. Fundamental analysis is a method used by investors to identify the intrinsic value of a stock. It captures whether the company can capture the business advantages in the industry, whether it has a unique product, how is its distribution network, how it is taking on competition etc. Thus, by adding the technical and fundamental indicators, investors execute the process of Swing Trading.

Understanding Swing Trading

The objective of Swing Trading is to make quick profits and use them for personal gain. Typically, investors using Swing Trading hold the positions for more than one trading session. It is because if the positions are sold within a trading session, it becomes an intraday trade. At the highest, these trades may last for a month, sometimes a couple of months, but generally do not exceed past this time frame.

The trading mindset within Swing Trading differs from one investor to the next. For example, one investor may seek highly volatile stocks thinking that the volatility will be positive, allowing for higher profits. On the other hand, investors with a lower risk appetite may seek less volatile stocks and make lower profits as long as there is a lower risk involved.

Here is an example for a better understanding of how Swing Trading works:

Let’s say you buy 1,000 shares of ABC company which are trading at Rs 500 with a total investment of Rs 5,00,000. Your goal is to make quick profits. Therefore, you set a Swing Trading mindset with a time horizon of one month. After one month, the price of the shares is Rs 650. Since you are at the end of the time horizon, you sell your entire position valued at Rs 6,50,000. Hence, using Swing Trading and just with a rise of 150 points, you make a Rs 1,50,000 profit.

Advantages of Swing Trading

Here are the advantages of Swing Trading:

  • Less Time: Generally, intraday traders have to monitor their positions every minute. However, as Swing Trading has a predetermined horizon, it takes less time to execute and in monitoring the positions.
  • Short term profits: Swing Trading allows investors to make quick and short term profits by capturing the bulk of the current trend and market swings. If the trend is upwards, Swing Trading can allow investors to make hefty profits in a short period.
  • Indicators: Swing Trading includes the use of technical analysis and fundamental analysis. As the included indicators are reliable and used by almost all the investors, Swing Trading becomes less risky when compared to other short term financial instruments.
  • Flexibility: One of the most important advantages of Swing Trading is that it doesn’t legally bind an investor to sell the shares after a specific time. If you are at a loss after your set time horizon, you have the complete freedom and flexibility to hold the shares for a longer time. Under Swing Trading, you do not have to sell your positions at a loss.
  • Financial goals: Swing Trading can allow investors to achieve their short term financial goals without having to cover the expenses with their savings. Swing Trading provides these investors with a way to invest their savings for a short period and remove their invested amount along with the profits.

Swing Trading Tactics

Here are some of the most commonly used Swing Trading tactics:

  • Fibonacci Retracement: It is a technical indicator based on Fibonacci numbers and allows investors to identify a specific stock’s support and resistance levels.
  • Trend Trading: This is a trading style through which investors attempt to realise profits based on the current market trend and the asset’s momentum. Trend Trading is undertaken by investors based on various technical indicators to help them identify the current market trend.
  • Relative Strength Index: The RSI is another oscillating indicator that traders use to assess market momentum, market conditions, and warning signs for potentially hazardous price changes. Its value spans from 0 to 100.
  • 10 and 20 days SMA: A Simple Moving Average is computed by taking the average price of a security over certain periods. They are usually constructed using the closing price, while it is also possible to calculate it from the open, the high and the low data points.

Final Words

Swing Trading is one of the best ways you can use to book quick profits in a short period. However, it is advised that you perform detailed technical and fundamental analysis before taking Swing Trading positions. If you need further knowledge about the factors included in Swing Trading, you can visit IIFL’s website to read comprehensive financial blogs.

Frequently Asked Questions Expand All

Swings in Swing Trading are the price fluctuations that occur with the price of the stocks within the time horizon. It is also defined as the volatility that a stock experiences.

Yes, Swing Trading can prove to be a good strategy for short term profits. However, it should be accompanied by technical and fundamental analysis.

Yes, Swing Trading is not a complex strategy. You just have to understand how to perform technical and fundamental analysis.