Explained: What is swing trading (2024)

The stock market has been witnessing volatility for the past few days amid the ongoing Lok Sabha elections.

Trading on Friday was full of highs and lows as the day started with a gain of almost 200 points in Sensex but ended with a decline of 732.96 points. Nifty also followed the same pattern throughout the day.

Amid this volatility, swing trading has been trending on the internet as different stocks have gone up and down in a series of highs and lows.

Swing trading is a way to make money by taking advantage of these movements. It's about trying to figure out which way the price is going and when it might change direction.

What is swing trading?

Swing trading is a style of trading where investors keep their positions for longer than a single day, typically holding onto stocks for several days or weeks.

This method is quite popular in the Indian stock market. The goal of swing trading is to capture gains in a stock's value as it swings up and down. Traders use various tactics to identify these opportunities, focusing on momentum and potential reversal points in stock prices.

The concept behind swing trading is comparable to stretching a rubber band—once a stock's price has moved significantly in one direction, it's anticipated to snap back in the opposite direction, offering an opportunity to profit.

How does swing trading work?

A swing trader will look for stocks with high volume (a lot of trading activity) and volatility (price movement).

They select stocks based on fundamental analysis and technical indicators like RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence) to understand historical performance and potential future movements.

The entry into a swing trade involves setting up stop-loss orders (to limit potential losses) and target prices (to capture profits) based on support and resistance levels.

Swing traders buy at support (lower price level) and sell at resistance (higher price level) anticipating the stock's price to swing back and forth within these bounds.

What's the objective of swing trading?

The primary goal of swing trading is to profit from short- to medium-term fluctuations in stock prices.

Traders aim to enter and exit positions quickly, typically holding stocks for 2 days to a few weeks. Swing traders capitalise on both upward and downward movements in the market, seeking to take advantage of trends and momentum.

Swing traders look for opportunities within market trends, utilizing technical analysis tools to predict price movements.

They may use strategies like trend following (predicting market direction) or mean reversion (buying or selling based on historical price data).

While swing trading offers numerous opportunities during each trading week, not every trade will yield profits due to market unpredictability.

Advantages and disadvantages

Swing trading offers flexibility and can be less time-consuming compared to day trading. Traders can benefit from short- to medium-term gains and adjust their positions swiftly based on market conditions.

However, it requires a deep understanding of market dynamics, and traders may miss out on long-term investment opportunities.