Swing trading simply refers to a stock-trading strategy that aims to capitalize on changes in price over a short period of time, typically a few days or weeks. It is a form of stock trading that can be regarded as midway between the continuum of day trading (where traders hold stocks for less than a day) and trend trading (where traders may hold stocks for several weeks or months). Swing trading is more suited to individual investors since they are better equipped to act fast and take advantage of short-term movements in prices of securities; unlike the larger trading institutions that are too big to act fast and mainly deal with large volumes.
When an investor is performing swing trading, investing fundamentals such as the assets and liabilities, intrinsic value and profitability ratios of a company are not important. Instead, a swing trader concentrates on short-term patterns and trends, using tools like swing charts. Here are some tips for beginners who wish to venture in swing trading.
Studying the workings of the stock market and overall economy
A swing trader requires to choose the perfect time to buy and sell stocks. It is therefore imperative to analyze all the vital economic and stock market signs. For instance, impeding positive financial reports about a particular company may suggest that it would be advantageous to buy and hold on to that stock for a couple of days or weeks. Other critical financial and economic information that an investor must analyze and be conversant with includes unemployment, inflation and sector-specific economic performance. It is highly beneficial to conduct thorough research about a company before investing in its stock. It is advisable for an individual who is a beginner in swing trading to initially practice paper trading where they can use a stock trading simulator to hone their trading skills without losing money.
Combining indicators and developing personalized strategies
Forecasting stock movement requires one to study a combination of indicators such as prices, volumes and time-frames. Using a single factor, for example volume of traded stocks is not sufficient. Combining various indicators this way this makes a trader to learn and develop more tactics, strategies and tools to use and enhances the likelihood of the trader achieving their profitability and income objectives. This way, the trader is able to formulate their own tools and strategies, and will not have to rely on so–called ‘advanced’ strategies of others which do not work in most cases.
Trading using savings
To begin swing trading, an investor’s brokerage account needs to have initial capital. The best source of this capital is the investor’s savings. It is imprudent to trade with money needed for paying bills or meeting one’s daily expenses. Trading on the margin (where a broker lends money for trading to an investor) is also not advisable. In addition, it is important to limit any single trade to not more than 10% of the total money set aside for trading.
Setting up stop loss orders to control losses
Discipline is critical when doing swing trading. It is recommended that an investor sets up a stop loss order as well as profit targets. These should be done at the point of placing the entry order so that the investor does not forget it later. This helps to control potential losses when trading.
A beginner is best advised to start trading on a small scale. In the initial stages, the objective should be to make a small or modest profit, not to become rich overnight. On completing research about a company, an investor can then determine the risk they are ready to take and how big the trade should be in relation to their total portfolio. With time, a beginner’s skill and confidence will grow and they will be in a better position to make larger investments.
The brokerage company is vital
A swing trader is required to have an online account with a brokerage company in order to begin trading in stocks. This comes with several related costs, including service charges and the fees for each trade. A beginner must evaluate these costs and ensure they are competitive. It is also beneficial to use a brokerage company that offers added services like stock trading tools and resources. The brokerage firm needs to provide first-rate customer services to make trading easier.
When picking the stocks to trade in, it is important to avoid trading in two companies that are doing similar business. A shrewd investor will instead buy the stocks of the company that has a chart showing a better pattern or the more solid company.