Swing trading is a form of trading where the trader holds positions over a period of few days to several weeks. This form of trading aims to make money from short term price movements. The idea is to close positions once the target price is reached and move out of transaction and look for a new opportunity for swing trading.
Understanding Swing Trading
Let us understand this concept with an example. Garima bought 100 shares of company ‘John Black Ltd’ at Rs 1,800 per share. She held on to the stock for 3 weeks. The share price increased to Rs 2,100 after 3 weeks. Garima now sold the 100 shares of ‘John Black Ltd’. In this transaction she booked a profit of Rs 30,000 [(2100-1800)*100] by simply buying the stock and waiting for a few weeks for the price to increase before selling it. The above transaction is a classic swing trading example.
Swing trading looks to make profits on the ‘upward or downward swings’ in a stock price. The swing trader generally seeks to make a profit of around 8% to 10% before closing the transaction. The idea is to make small gains on many swing trades and build a large profit ultimately.
Swing Trading – Points to Note
- Choosing the right stock is important in swing trading. Choose stocks which have trading volume and liquidity in the market. Generally large cap stocks are considered right for swing trading.
- Swing traders use technical charts and multi-day chart patterns to make trading decisions. As a thumb rule, go with the market trend in swing trading.
- In a bear market, it is advisable to not do swing trading if one is not confident of their trading plan.
Advantages & Disadvantages of Swing Trading
| Advantages | Disadvantages |
| You need to invest less time as you can buy a stock and then hold it. Swing trading can be done along with a full time job. | The gains from swing trading are normally in a limited range. One can miss out on stocks which if held long term would have made great money. |
| It has the potential to maximise short term profits by capturing the movements in stock. | Trading positions are subject to overnight market risk. |
| Traders can depend exclusively on technical analysis for swing trading. This makes it easier to trade. | Timing the market is very difficult. |
| Swing trading does not block your capital for very long as the trading position is normally closed in a few weeks. | The cost of swing trading can increase significantly with an increase in number of trades. The trader has to ensure that the profit made after deducting the trading cost is reasonable and worth the effort. |
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