What is Swing Trading?
Swing trading are short term strategies to take advantage of price swings, either reversing back to the median or fading a rally.
Swing trading attempts to capture gains in a stock (or any financial instrument) within an overnight hold to several weeks.
Why Swing Trade?
Swing trading involves holding a position either long or short at least overnight and or up to several weeks. The goal is to capture a larger price move than is possible on an intra-day basis. Swing trading assumes a larger price range and price move and therefore requires careful position sizing to minimize downside risk.
Swing Trading is a strategy that focuses on taking smaller gains in short term trends and cutting losses quicker.
The gains might be smaller, but done consistently over time they can compound into excellent annual returns.
Swing Trading positions are usually held a few days to a couple of weeks, but can be held longer.
Swing Trading Strategy
The swing trader's focus isn't on gains developing over weeks or months; the average length of a trade is more like 5 to 10 days. In this way, you can make a lot of small wins, which will add up to big overall returns. If you are happy with a 20% gain over a month or more, 5% to 10% gains every week or two can add up to significant profits.
Of course, you still have to factor in losses. Smaller gains can only produce growth in your portfolio if losses are kept small. Rather than the normal 7% to 8% stop loss, take losses quicker at a maximum of 2% to 3%. This will keep you at a 3-to-1 profit-to-loss ratio, a sound portfolio management rule for success. It's a critical component of the whole system since an outsized loss can quickly wipe away a lot of progress made with smaller gains.
Swing trading can still deliver larger gains on individual trades. A stock may exhibit enough initial strength that it can be held for a bigger gain, or partial profits can be taken while giving the remaining position room to run.
A swing trader looks to trade in liquid stocks/indices which are trending. They generally avoid flat markets, which is why some people call swing trading as Momentum Trading. For a swing trader the basic premise for any trade is that trend is your friend. There are many methods adopted by traders to identify a trending stock, like using the ADX (average directional index), moving average convergence divergence (MACD) or fast moving averages.
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