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SWING TRADING STRATEGIES
December 13,2024
by : Rishu Kumar Ray (NISM Certified Research Analyst)
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Swing trading strategies attempt to capitalize on price fluctuations over the short term. Learn how traders use swing trades.
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Markets rise, and markets fall. Sometimes prices move a lot in a short period; sometimes they stay within a tight range over a long time, underscoring the market's always-on fluctuations.
If you're a long-term investor, your focus may be the bigger picture—the larger market trends and cycles, such as bull and bear markets. But within the larger currents exist a multitude of minor price fluctuations: "swings" in the form of smaller rallies and declines. Simply put, several trends may exist within a general trend.
Some traders attempt to capture returns on these short-term price swings. The term "swing trading" denotes this particular style of market speculation. Perhaps you've been tempted to venture into this style yourself. If you're not familiar with it, read on for a brief explanation.
As a form of market speculation, swing trading strategies involve opportunity but also risks. And as is evident in all market speculation, past performance is no guarantee of future outcomes.
What is swing trading?
In its simplest form, swing trading seeks to capture short-term gains over a period of days or weeks. Swing traders may go long or short the market to capture price swings toward either the upside or downside, or between technical levels of support and resistance.
Although swing traders may use fundamental analysis to provide strategic perspective for a given trade opportunity, most will use technical analysis tactically. There are four components that are widely considered critical to a trade setup:
Which direction to trade-long or short
At what price to cut losses
At what price to take profits
Where to enter the market
The technical component is critical in swing trading because of the tight time constraints of the trades. Think of it this way: You're projecting that an asset will reach a specific price (or profit) within a relatively specific window of time.
So, when entering a swing trade, you often must determine why you're buying or selling at a specific price, why a certain level of loss might signal an invalid trade, why price might reach a specific target, and why you think price might reach your target within a specific period of time.
Some professionals believe fundamental analysis, with its focus on economic cycles, company and sector earnings, and other longer-term trends, isn't typically suited for specific entry and exit points. However, it may inform the decision to trade a particular asset.
Technical analysis and chart patterns, which can focus on narrower time and price context, might help traders visually identify specific entry points, exit points, profit targets, and target levels.
At this point, you might be noticing other patterns and asking:
If swing trading is about seeking short-term profits, then isn't it similar to so-called "day trading"?
If a swing trader can hold a market position for several weeks, isn't that similar to long-term position trading, almost like "investing"?
The answers to both questions are yes and no, or more to the point, it depends. Swing trading sits somewhere between the two. Let's explore the differences.
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