L.L.T. (Chapter 8) – What Is Swing Trading all About : Performing a Demo Swing Trade

Swing trading is a combination of both technical and fundamental analysis. It is for traders who take decisions on the basis of technical analysis but are keen to get a reward based on their risk  reward ratio. It is based on the reward gained pattern. Sometimes it takes more than months for a trader to get the desirable gains, hence it is known as swing trading. The nature of this trading is that traders are not sure when they will exit the position as the decision depends upon the time when they gain their profit. The price action is a very important feature in this type of trading. The entry points are based on the price action analysis only. Whenever there’s a trend reversal on a technical basis the traders enter the positions. 

Who Should Opt For Swing Trading and Why ?

Swing trading is more suitable for people who believe that a combination of both the analysis method is perfect for a trade execution. It is beneficial for people who have the holding capacity for large positions. The reason being the untimed manner of investments required. Sometimes if the time limit for margin ends and the gains are not yet achieved then one needs to stay back to the position. Hence one should take positions based on the holding capacity in swing trading.

Most Important Aspect in Swing Trading

Important aspect is the understanding of entry points and exit levels. The trader should be very disciplined regarding his entry and exit levels. He should strictly adhere to the stop loss price and extend the pricing levels of profits as and when the gains extend. 

Let’s understand this by an example. 

As seen in the chart it is a forex trading candlestick pattern. Here the entry level for a swing trader is triggered by a big green candle around 1.5880 and one should hold the position until the initial level isn’t breached. This indicates the point where the green candle began its rise. 1% below that green candle initiation should be the stop loss point.

Now a swing trader enters the trade with a desired profit level based on his entry price. If that price is hit the ideal way is to square off the position but if the trader wants to hold on the position what he should do is keep placing the stop losses at the previous lows. So if the target of 1.62 is achieved and the currency is showing potential, he should place the stop loss at 1.615 and keep attaining more gains. After the price moves up he should keep moving his stop loss upside as well. 

Similarly as seen in the chart when the price hits the stop loss level without any attachment to the trading preposition it should be squared off.  Also one should never look back at that currency or stock position again for some time if they don’t have the control and discipline to not enter again in hassle. 

Risk and Reward Pattern in Swing Trading

Swing trading is all about the risk reward ratio. If a person risks 1 Re. of investments he expects gains of at least 3 Rs from it. This would provide the person with annual gains of 24% per year. Now how is the risk reward determined in a trade. 

Lets understand with a simple calculative example. Suppose the share of Reliance is priced at 1850 Rs. Now the share shows momentum and forms a long green candle from 1875 Rs. So the price of 1875 is the lowest point on the chart for the swing traders. They place their stop losses at around 1865 – 1870 Rs. 

Now if the person enters the trade at 1900 Rs. It means he is risking 30 – 35 Rs of his investments. So the ideal level of return should be around 1990 Rs. This would give the trader his returns back. So the profit booking level is in the range of 1990 – 2000 Rs and the stop loss for the trade is 1870 Rs. Until the level is reached the trader needs to hold the position.

Swing Trading Strategies to Execute Trades

The best way to indicate an entry level is the candlestick pattern and the stochastic oscillators. Sometimes the DMA also provides confidence in the entry of a trade level. The most commonly referred candlesticks patterns are Crossovers, Cup and handle patterns, head and shoulders pattern, Evening star and others. 

Also the traders keep the time frame of the charts around 15 minutes to 1 hour. This helps them to notice any price actions favorable for them. The swing traders also look towards capturing the price correction moments in the market. Whenever there is a drastic price fall in Bank Nifty and Nifty50 they keep those levels in mind and create a position on the basis of the next support level. Thus the next support level is their stop loss and the price from where the fall was initiated becomes their profit booking point.