Understanding Swing Trading: Basics And Benefits
Swing trading finds itself in a sweet spot between day trading and investing for the long haul. Stocks are held for one to several weeks (sometimes days, other times months) in order to capture swings in a stock price taking place on a short- to medium-term basis. Swing trading is a tactic based on spotting and profiting from the ‘swings’ – or pulling back – of a longer-term trend. Technical analysis is commonly used by swing traders, who look for direction through tools such as moving averages, trend lines or oscillators.
If you seek more frequent trading opportunities without the need to glue yourself to a screen all day, then swing trading could be for you: it is time-flexible (ie, it won’t drive you crazy if you need to drop your computer for a few days) and offers more trading opportunities than long-term investing, yet less frequent trades than day trading. Although the profit per trade is generally smaller than a day trade’s, successful swing trading amply compensates with the number of trades you can take. Swing trading can be very profitable if you perform it correctly because it uses the direction of the market to your advantage, meaning you profit from both upward and downward market swings.
Criteria For Selecting Top Swing Trade Stocks
The key factors considered when trying to select the best swing trade stocks to maximise profits and minimise risks are liquidity and market capitalisation, volatility, defined trends and patterns. Liquidity is important in top swing trade stocks because it provides the capability of entering and exiting a stock position without raising the price of the shares. Higher priced stocks may have a hard time retracing their steps. Volatility is also very important for swing trading as prices are able to fluctuate within a short period of time. Stocks that move come back and move back again without many retracements are easier to follow and make a plotted trend line from the lows and highs. A stock that moves up and down every day is difficult to analyse. Volatility excites swing traders because market volatility reflects high uncertainty or risk, and this uncertainty causes prices to show upside/downside movements not seen in less volatile stocks.
Fundamental analysis is also a contributing factor due to the volatility of the stocks we’re working with: stocks that post strong earnings reports or are the focus of some kind of positive news are more likely to trend upward than stocks that don’t print news or do not present strong earnings announcements. Technical indicators such as moving averages, Relative Strength Index (RSI) and candlestick patterns can also indicate probable buy or sell signals. Armed with this information, swing-trading opportunities can be spotted in the chaos.
Analyzing Market Trends For Swing Trading Opportunities
Market research helps determine possible promising swing trade opportunities. This trading strategy looks to profit from short- to medium-term price moves that can last up to a few days or weeks, depending on the trader in question. Hence, the entry and exit timing becomes very important. Traders often refer to technical analysis, which is based on price movements and chart patterns in terms of moving averages, support and resistance levels, candlestick formations, plus volume analysis and momentum measures, which help to determine the movement of the price action. In other words, the term defines the concept that adds up a group of trades that involves different technical styles for boosting trading performance and performance optimization.
Fundamental analysis can also add to the mix: following quarterly earnings reports, macro-economic data and other industry news can help traders get a better sense of a stock’s underlying value. Put them both together, and a trader should be more assured that he is purchasing or shorting a stock with a decent risk/reward ratio. The greater a trader’s awareness of broader developments in the market and sector-specific tides, the more he is able to seize the opportunity presented by volatility and scalp some profits.
Top Sectors To Watch For Swing Trading Stocks
Another thing to look for if you are looking for good swing trade stocks is volatility. You want to find stocks that belong to industries that are more volatile than others and are less tied to macroeconomic news. One of the best places to find volatility is technology (IT). Innovation cycles are shorter and product cycles are intense so companies that are active in this industry have a tendency to have wild swings for both good and bad reasons. This allows room to find opportunities. The healthcare sector is also a great place for swing trading. Tremendous opportunities can be found in biotech stocks or even big pharma and medical device companies that are looking for regulatory approval from the Food and Drug Administration for their new drugs and treatment. The energy sector is another place that is impacted by volatility. In fact, most of the commodity sectors tend to swing to a much higher degree since they are not linked to macroeconomic news. This makes them better for swing trading. They can be affected by supply disruptions, weather and geopolitical events.
Seasonal sales impact consumer discretionary stocks such as Apple shares or Amazon.com, as do sentiment shifts for Levis Strauss shares. Shifting interest rates and other economic indicators impact financial and day trading opportunities that swing traders will want to be aware of. Shifting market conditions also matter and can affect traders’ entry and exit decisions on an intraday basis. As news emerges on swing trading stocks, be prepared to react to the news and have a strategy in place to do so.
Risk Management Strategies In Swing Trading
Swing trading can be quite profitable – but it’s also risky. And unless your risk management is tight, it won’t take long for you to blow up your account. To protect yourself, set a stop-loss order on each position to sell the stock if its price moves against you to a certain point, so as to cut your losses if the stock keeps moving. What’s more, you should limit the amount of total money you bet on any particular trade – perhaps by never committing more than, say, 2 per cent of your total capital to any one position.
Diversifying across sectors goes some way towards mitigating this risk by reducing reliance on one particular sector. A disciplined approach goes some way towards managing risk. By sticking to your trading plan, wherever possible, and not allowing emotion to sway your decisions, you’ll reduce the risk of poor decisions based on greed, fear, hope or confidence. Keeping an eye on market conditions and being ready, willing and willing to change tack will stop you from becoming too much of a prisoner to your original strategy, thereby increasing the robustness of your trading portfolio.