The stock markets are volatile and the prices and trading volume fluctuate throughout the trading day. Depending on the asset being traded and the market conditions, the market prices can grow or drop drastically. Since every trader is different and has varying trading strategies, everyone has a different outlook on the outcome. Now, there are some trading strategies that are designed to ride on the price changes and reap the benefits. Swing trading is one such popular trading strategy that is used in all financial markets, for all traded assets.
While the concept of this strategy is quite straightforward, implementing it has its own intricacies and challenges. Let’s look into the specifics and understand a bit more about how it works and everything worth knowing about it.
Trend analysis and identification
At any given point in time, there is a slight increase and drop in share prices with every trade on the exchange. But not every instance is the best option to execute the swing strategy. The traders use sophisticated analysis techniques to identify these trends using charts and technical indicators like support and resistances, RSI etc. Moreover, each of these trends has different time frames and potential entry and exit windows.
Swing strategy investors often align their executions with the previously observed trends in conjunction with the current market indicators.
1. Understanding the time frames
When it comes to choosing analysis time frames, there is no golden rule or right answer. Every stock is different, every trading day is unique and each trader has a different risk appetite. Therefore, different stocks will show different trends across varying observation periods. Analysis periods usually vary from a few hours to as long as a few months, depending on the market conditions. The commonly used time frames however are daily, hourly and morning and afternoon trading sessions.
2. Entry, holding and exit strategy
While executing a swing strategy is quite simple, doing it right requires strategic thinking and planning. Traders must devise a robust entry and exit plan as well as the holding period. They look at the right technical indicators to enter and exit their positions to book a profit. But at the same time set up stop-loss positions to lock in their profits as a fail-safe. According to the market situation and volatility in the asset, investors can choose different holding periods. These can either be intraday positions or hold them for as long as a few weeks.
3. Risk assessment and tax considerations
Swing trading is quite an aggressive trading strategy and is considered a risky bet as the trends are uncertain. Seasoned traders often use various hedging techniques and perform extensive risk assessments before investing in such strategies. Usually, they invest only a fraction of their trading capital and use stop-loss to protect against great losses. Moreover, all capital gains in share market in India are subjected to taxes, which means all profits are taxed. But at the same time, there are no incentives for any losses incurred during trading. Therefore, while trading, you should look at the tax implications of all trades and keep accurate records for tax filings.
