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Trade is deeply seated in human nature and it dates back to ancient times. Then, people would trade cattle for grains (barter). Today, after centuries of civilisation and technological advancement, we speak of swing trading, position trading, day trading, and the list can continue. Before we start in full swing (pun intended), let’s do a time-travelling exercise and look at what humanity has achieved in ages of trade and industrialisation.
Swinging through centuries, humanity has seen four industrial revolutions:
- 1765 – the introduction of machinery in agriculture
- 1870 – the emergence of new sources of energy: electricity, gas, oil, and the invention of the telephone and the telegraph as new means of communication
- 1969 – the rise of electronics, telecommunications, and PCs
- 2000s – the Internet and the advent of digital technologies
The rise of digitalisation shaped not only the way we interact with the world around us but also the way we spend and most importantly, the way we invest. From this perspective, online trading opens a new frontier that is worth exploring. Swing trading is perhaps one of the most versatile strategies that can help you build a well-balanced and diversified portfolio. Here are a few ideas how to get started.
1. Consider the fundamentals
One of the key aspects of swing trading is following the news. Making sure you cover the fundamentals is crucial in swing trading. No, this is not a strategy where you can simply rely on your market intuition. Essentially, with this type of strategy, you are trying to capture short to medium-term gains in stocks, bonds, currencies, etc., spread out across a few days, weeks, or even months. Swing traders rely a lot on technical analysis to determine price trends and identify best buys or best sells. However, technical analysis alone does not cover you fully. This is why it is also important to marry the technicals with fundamentals, including corporate actions, quarterly earnings, economic data releases such as the GDP m/m, core retail sales q/q, interest rate decisions, and so on. This cluster of information will give you a clear picture of what is happening on the chart and why.
2. Weigh industry strength
Swing trading calls for quite a few skills, including or rather primarily the ability to assess the relative strengths of different market sectors. If you determine which stage the economy is in, by considering some of the fundamental factors mentioned earlier, then you will have a pretty good idea of which sector will likely lead the market in the near future.
Remember that the market moves in cycles. Looking at the market cycles will also allow you to determine whether the economy is facing recession or is in recovery mode. The graph below serves as a good example of how the market evolves.
3. Knowing when the time is right to swing
To be a successful swing trader, you need to use market indicators. But how do you know when the time is right to swing? Here is what you need to be on the lookout for:
- Determine whether the market is moving with you or against you. Before you go all the way in with a long BUY position, it is vital to understand whether the market you are buying the equity in is in an uptrend or downtrend (that is if you’re into stocks).
- Establish that the industry sector you’re planning to invest in is in your favour. Stocks, for example, tend to roll with the flow of their industry group. You may have noticed these days that tech giants the likes of Apple, Microsoft, Amazon, or “cosy” guys like Netflix and Disney have been skyrocketing for a number of weeks when the infection cases were on the rise, and plummeting as vaccine hopes pulled other candidates higher.
- Look for breakouts. Study the chart pattern carefully to understand whether your stock is entering or resuming an uptrend (or a downtrend) before you make your swing. The ADX indicator can help you determine that. Alternatively, if the market is trendless or, in other words, if your highest highs and lower bottoms are pretty much frozen at the same level, it means the market needs some action. In this case, you may want to wait a little longer before you make your entry. Remember, no matter where it’s headed, trend is your friend. So, follow it. By comparison, trendless markets are highly risky, and you should better wait for a trend to light up your chart.
- Find where your stop-loss level is. If your Stop Loss is near your desired execution price, then you can be sure that the time is right to swing. The closer your protective Stop Loss is to your entry price, the higher your chances of success.
- Tread with caution. Keep in mind that even the best swing trading candidates can go belly-up. So, make sure that your position size matches your target. In essence, add an absolute ceiling on your position and a maximum percentage of capital that you can afford to lose on a single trade and for your entire portfolio. That’s it.
Pros and Cons of Swing Trading
As any other strategy, swing trading has both advantages and disadvantages. For one, if you’re more of a technical trader, swing trading is the way to go as it allows you to creatively use your skills.
Compared to other strategies like day trading, for example, this strategy helps you maximise your short-term profit potential by taking advantage of the whole bunch of market swings.
Although fundamentals play an important role in swing trading, the technical aspect of market analysis is the core of it, simplifying the trading process.
While these advantages cannot be ignored, before you decide to go swinging, you may wish to take into consideration a few less “rosy” aspects of swing trading, such as overnight and weekend market risk, sharp market reversals, which can result in substantial losses, lack of focus which can cause you to miss out on longer-term market trends as opposed to shorter-term ones.
Let’s swing it!
Now that you have a pretty good idea of what swing trading is all about, are you ready to see it in action? Trade360 offers you plenty of opportunities to use this amazing strategy on either your demo or live account. Get started today.
