Why should you Swing Trade?
Video Transcript is below if you prefer to read it.
Welcome to this byte-sized tradeducation series from Researchfin.ai. Here we share our thoughts and ideas about trading, in under 5 mins. This is for educational purposes only. This is not investment advice.
Today we will talk about Swing Trading.
First, what is Swing Trading? Swing trading aims to capture the short or medium-term price movements of a stock over a few days or weeks. And then compound the return by doing multiple trades repeatedly and consistently.
So, how do you Swing Trade? The goal here is to identify stocks, that have reached an equilibrium between buyers and sellers. This is typically when the stock is either trending up or down in the short to medium time frame.
The equilibrium is characterized by the compression of the stock’s volatility and reduced volume. Often, traders like to use chart patterns, like the cup and handle, that help identify what path the stock price took to reach the state of equilibrium. The equilibrium offers a potential low-risk entry point, when the stock either breaks out from this equilibrium on the long side, meaning buyers are taking over sellers, or the demand is greater than the supply. Or the stock breaks down from the equilibrium on the short side, meaning sellers are taking over buyers, or the supply is greater than the demand. This tends to move the stock in the respective direction of the break-out or break-down in the shorter time frame, delivering a high probability of a positive return, with a potentially high reward to risk ratio.
The key, to successful swing trading, is an effective technical analysis process. Combining this with some fundamental analysis helps improve the results, by helping traders select high-quality stocks.
While stock picking is important for swing trading success, stock exiting is risk management by taking profit and using stop loss effectively.
Why is Swing Trading effective? Let’s take a common scenario. Say, this style works 50% of the time. When it works say you make a 9% return, and when it doesn’t work you take a 3% loss from the trade. So this makes it a 3 is to 1 reward to risk ratio. The expectation from this trade then is a 3% return. Let’s say the average holding period for the trades is 10 days. Essentially this means a 3% average return in a 10-day period. This, of course, will only hold over several trades. Now, on a compounding basis, this results in a 109% annualized return! This means that you could, potentially, double your account value, every year, by doing swing trading, assuming this scenario holds.
So, when should you Swing Trade and when not? Swing trading is a very effective strategy, when you are looking for building a full-time, or part-time income from trading. It is effective if you are looking to grow your trading capital quickly. It is also a great tool to achieve financial independence.
The advantage of swing trading is that it requires much less time commitment than day trading. But you still have to spend some time every day on the market to manage your positions to time the entry and exit well.
But swing trading is not a long-term investment strategy. So, if you are interested in investing for certain specific financial goals then swing trading is not the ideal strategy. Also, trade positions in swing trading are subject to overnight and weekend market risks. Abrupt market reversals, especially during earnings releases, or on news, can result in substantial losses. So being aware of upcoming earnings, and potential market-moving news events like the F.O.M.C meetings is important if you are a swing trader, to manage risks.
Researchfin.ai can help you swing trade effectively. We use state-of-the-art AI and machine learning to identify trade setups automatically. The AI also helps identify the optimal exit point to maximize the return and manage risk better.
This saves traders a lot of time and helps improve productivity to do high-performance trading. To learn more visit us at www.researchfin.ai.
You can download the app or try it out for free for 30 days. Please give it a spin and let us know your feedback at firstname.lastname@example.org Hope you found this video useful. See you in the next video! Goodbye!