5 Parameters to Consider for Swing Trading

“The trend is your friend until the end when it bends.” How many of you have heard this quote? Those who already have, then we are sure that they must already have heard about swing trading too, and those you haven’t, don’t worry! We will decode it for you.

For starters, swing trading is a trading style that helps us to capture short to medium-term gains for a period of a few weeks in any stock or financial instruments. Swing traders usually use technical analysis for picking up stocks for swing trading!

But wait! Swing trading shouldn’t be confused with day trading. The main difference between day trading and swing trading is the holding time. Yes! The positions in day trading are closed within the day, whereas the positions in swing trading can be carried forward and held for a few weeks to a month.

Having understood what swing trading means, in today’s blog, we will discuss the five main factors that one should consider for swing trading are:

1. Breakouts

As discussed above, swing trading refers to trading with the trend. Thus, the breakout from a range, chart pattern, important resistance and support zones, or reversal candlestick patterns are some technical tools that swing traders should pay attention to.

For example, from the weekly chart below of Tata Motors Ltd, one can see a double Bottom formation after a downtrend. Double Bottom is a bullish reversal chart pattern that indicates the stock may reverse to up.

We can see from the above chart that after the breakout from the double bottom chart formation, traders can enter the trade for swing trading and continue until the price objective of the pattern reaches, or the trend ends. However, one should note that the traders should only enter the trader after the breakout, which is confirmed by the volume as shown in the above chart. Thus, swing traders should look out for the breakouts in the stocks for entering a position in the same.

Buy why volume is so crucial for selecting stocks for swing trading. Well, let us discuss this:

2. Volume

Volume is an essential tool for swing traders as it helps them analyze the strength of a new trend. The main reason behind this is that a trend with high volume will be stronger than one with weak volume. In addition, more traders buying or selling gives a better basis for the price action.

The above chart shows that volume is mainly helpful as a part of a breakout strategy. However, breakouts tend to follow a period of consolidation or a chart pattern usually accompanied by low volume; volume spikes when the breakout takes place. Traders can also use volume indicators for analyzing the volume in the stock.

3. Liquidity 

One of the most basic rules for swing trading is that traders should only trade liquid stocks. Of course, the daily minimum you select is arbitrary, but the most helpful example is 500,000 shares per day.

This is because one can exit high liquidity stocks quickly and with less risk of a loss from the bid-ask spread. More liquid stocks generally show lower bid-ask spreads. One should note that recognizing a bad trade or potential loss requires discipline that is one of the main tents of swing trading. Thus, swing traders can quickly exit a trade when stocks are liquid.

4. Relative Strength

One should select those stocks that are relatively stronger than the sector or the index for swing trading. This measure helps us identify both the strongest and the weakest securities or any asset classes within the financial market. Usually, the stocks which display strong or weak RS over a given period tend to continue going forward.

5. Volatility 

Volatility is one of the major factors for selecting stocks for swing trading. Volatility helps us to measure how much the stock price will move. Traders can use volatility indicators such as Bollinger bands or ATR to gauge how volatile the stock is. Swing traders should select those stocks for trading that are volatile. Large moves are generated by volatile stocks and give us a reasonable window for stops and profits.

You can also read more about Swing Trading from ELM School

Using StockEdge Strategies to find stocks for Swing Trading

In StockEdge, there are ready-made bullish as well as bearish swing trading strategies as shown below:

After clicking on any of the above strategies, traders will get a list of stocks that they can use for entering a position for swing trading:

Webinars on Swing Trading

1. Finding the Right Swing Trading Strategy by Vishal Mehta

The market is usually trending 20% of the time and the remaining 80% of the time market spends in range-bound mode. Hence, we need to decide on various swing trading strategies for the range-bound market. This webinar Finding the Right Swing Trading Strategy by Vishal Mehta will help you showcase multiple strategies for profit-making.

2. Path-Breaking Golden Swing by Souradeep Dey

Many people cannot focus on the market during entire market hours because of their work-related engagements. Thus, they require a good swing trading strategy with a high success rate, generating less but more accurate trades.

With the help of this webinar on Path-Breaking Golden Swing by Souradeep Dey, traders can learn about Golden Swing set up, in which one may get only 2-4 trades in any given year in a particular stock in the Daily time frame. 

Also, watch our video on Swing Trading

Bottomline 

We hope that we have answered how to pick swing trade stocks, but we also need to understand that this type of trading involves more risk than day trading as the holding period is extended. Thus, it would help if you also had a good strategy for spotting trading opportunities and potential red flags.

Traders also need to keep in mind that the strategies explained above in this blog aren’t the only answers. Every trader must find a strategy that suits their trading style. Traders should not rely on other swing trading tips. We hope you found this blog informative and use it to its maximum potential in the practical world. Also, show some love by sharing this blog with your family and friends and helping us in our mission of spreading financial literacy.

Happy Investing!