Stocks to Swing Trade?
If there is one thing the stock market does almost like clockwork, it is swing. Not only do the prices of different stocks in the market keep fluctuating, but so do the corresponding fortunes of the holders of different positions on said securities. Whilst intra-day trading is a commonly used approach to use the swing of the stock market to trade stocks within a day, some traders tend to prefer swing trades.
What is Swing Trading?
Swing trading is an approach to trading in stocks that encompasses holding positions for longer than a day to use the short to medium term rise in a stock's price to one's advantage. Swing trades may last anywhere between a few days to a few months and are adopted to benefit from an anticipated upward swing in a stock's price.
How Swing Trades Work
Swing traders generally use a combination of technical analysis and their own risk-reward assessment to determine which stocks to choose and when. If you are thinking of entering into a swing trade for a particular stock, it is advisable to engage in a thorough analysis of the price and volume markers of said stock over the past few months and determine your risk-reward matrix.
For instance, if you purchase a stock at a price of ₹79 in a swing trade, anticipating it to grow to ₹84 in the next month, your potential gain is ₹5 per stock. However, you should also determine a stop loss to safely exit the trade with a loss that you are ready to bear. If the price of the aforementioned stock keeps falling and reaches, say ₹77, you may want to get out of the trade. A significant aspect of swing trades is the risk you are ready to bear for an anticipated gain.
Also Read: 3 Important Exit Strategies for Day Traders
Swing Trades - Pros and Cons!
Here are some of the advantages and disadvantages of swing trades.
Pros of Swing Trades
|Cons of Swing Trades|
|Swing trades need lesser time than day trades;||There is an enhanced risk of overnight price drops and losses owing to stock positions held beyond a day;|
|They can help you capture the short to intermediate gains in a stock's price;||If a stock's performance is not in alignment with the expectation for a swing trade, there can be significant losses;|
|They can be entered into based on technical analysis of a stock's performance.||Long-term market opportunities tend to be ignored in favour of short to medium-term ones.|
Markers to Look for in Swing Trade Stocks
If you are looking for the best swing trade stocks, here are a few markers that can help you identify them.
- The Liquidity of a Stock: One of the markers of optimal swing trade stocks is their liquidity. The liquidity of a stock reflects its trade volume in the market. Therefore, the higher a stock's liquidity, the higher its demand and potential growth. Swing traders in India tend to opt for stocks with a high degree of liquidity to enter swing trades. A highly liquid stock is also less risky than one with low liquidity.
- How a Stock is Performing: While picking a stock for a swing trade, you should look for stocks whose performance is consistently exceeding the overall performance of the index, sectoral and wider stock market indices alike. This way, you can select high-performing stocks that are leaders in their respective sectors in terms of their trading performance.
Also Read: 5 Rules for selecting stock for Intraday Trading
- The Volatility of a Stock: It may be tempting to invest in a stock that has turned heads overnight with a sudden spike in its price. However, high volatility goes both ways, and the sooner such stocks rise to the zenith of the market, the sooner they can fall back down as well. Therefore, it is advisable to opt for swing trade stocks that are relatively stable and exhibit low to moderate volatility.
Swing Trading is a highly effective stock market trading strategy, albeit one that requires clarity on your risk-reward appetite, careful selection of stocks, thorough analysis, and a regular watch on the market. While selecting stocks to swing, you should consider various important factors, including liquidity, performance, and volatility.
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Frequently Asked Questions
A Repetitive Trading Pattern for a stock means the recurrence of similar movement patterns in the price of a particular stock over a given period. Stocks with a highly repetitive trading pattern are considered stable and ideal for swing trades. The more repetitive this pattern is, the more reliable a stock is.
From March 1, 2021, the margin required to enter into a swing trade in the Indian stock markets has been increased to 50 per cent by the Securities and Exchange Board of India (SEBI). This margin was 25 per cent before the change, and the rise has affected trade volumes.
Direction Bias in swing trades refers to the tendency of swing traders to use the anticipated direction of a stock's price movement as their guide to select stocks for swing trades. For instance, if a swing trader expects the price of a stock to go up over a given period, they will enter into a swing trade accordingly based on that direction bias.