Swing Trading and Stock Market Investing Tips

What is Swing Trading and is it Right for You?

There are different types of trading or investment strategies that people following when trading stocks and shares. Day trading, long-term investing and swing trading.

Day trading as the name implies is trading over the period of a day and closing all your positions before the stock market closes. Long-term investing is taking a position that lasts a few years a la Warren Buffett.

Swing trading involves trading in stocks for short period of time, usually a few days, in order to take advantage of a swing in the price. Effective swing trading involves identifying an uptrend or a downtrend in a stock price. In an uptrend the highs are higher and the lows are higher too. Swing traders look for predictable patterns in order to predict when a stock price will stop falling, turn around and start rising again. 

Swing trading is all based on calculating the risks against the rewards – if the risk is too relative to any potential rewards then there is no point in the trade. There are a number of criteria that must be met before a trade is placed.

Stocks are generally trading higher than $ 10 with a daily volume of more than 500K shares, as such stocks are less liable to be manipulated. To identify a stock which is in an uptrend the closing price must be above the 10-day moving average and the 20-day simple moving average and the 10-day moving average needs to be above the 20-day moving average.

There are a number of points to take into consideration when swing trading to limit your risks.  Don’t invest all your money in one go. If a stock gaps up 1 to 2%, then buy half the amount you intend trading. Wait to see if the price continues to rise before investing more money. If the stock gaps up 2 to 3% then only invest 1/4 of the total amount you intend trading.

If the share gaps up more than 3% then don’t bother with the trade as the risk/reward ratio is not good enough. The aim when swing trading is to achieve a profit of 5 to 10 % if you achieve this (or if the trade turns against you and you start losing money) then close the trade and look for another opportunity.

Stop losses. Everyone makes losses, the trick is to make sure your losses are smaller than your gains. To ensure this you need to set stop losses when you place your trade, such that if the trade goes wrong the position will be automatically stopped out. Given that in swing trading the profit objective is in the region of 7% your stop loss should be set at approximately 4%.