Swing trading might be more appealing to beginner traders. It allows traders to test the waters without a significant capital investment and without investing the majority of business hours monitoring stocks.
Swing trading is good for beginners because it doesn’t require much starting capital, requires less active attention than day trading, allows one to start slowly and build over time, and lets one work full-time without sacrificing the quality of trades.
There are several benefits to swing trading that make it a viable option for beginners. In this article, I will discuss these benefits as well as some other helpful information regarding getting started with swing trading.
IMPORTANT SIDENOTE: I surveyed 1500+ traders to understand how social trading impacted their trading outcomes. The results shocked my belief system! Read my latest article: ‘Exploring Social Trading: Community, Profit, and Collaboration’ for my in-depth findings through the data collected from this survey!
Table of Contents
Why Swing Trading Is Good for Beginners?
Swing trading is an investment strategy where the investor buys and holds assets. Buying an asset with the intention of holding it is referred to as holding a position. With swing trading, you hold the position for a short period of time, ranging from a few days to a few weeks.
Swing trading is a good choice for beginners for several reasons:
- Smaller starting capital. An average starting amount for swing trading is $5k to $10. Some begin with less.
- Less demanding than day trading. It requires significantly less active attention than day trading does.
- Ability to start slowly and build over time.
- Work full-time and swing trade simultaneously. Day trading is often a full time job.
Analysis
The expected outcome of swing trading is that the price of the asset swings in a favorable direction for the investor and the investor acting on the swing, resulting in a profit. It does require a significant amount of analysis to judge when an investor should enter or exit.
With the proper analysis, gains can be made. Focusing on and studying short-term and medium-term trends, the trader won’t likely net tremendous gains, but consistently making smaller gains can add up significantly over time.
There are two main schools of thoughts in relation to analyzing swing trading and the market in general: fundamental analysis and technical analysis. While they have key differences, they’re both designed with the same goal in mind: forecasting future stock prices.
Fundamental Analysis
Fundamental analysis requires a great deal of scrutiny. It assesses the overall value of a stock, factoring elements such as assets, earnings, expenses, and liabilities. Fundamental analysis expands their study to the industry conditions and so far as the economy overall.
Technical Analysis
Technical analysis, on the other hand, seeks to identify opportunities utilizing statistical trends. It relies on the movements of price and volume rather than overall value and interprets data from stock charts to recognize trends that indicate the stock’s future.
Technical analysis is derived from various formats. Some of the most common are briefly explained below:
- Simple moving averages (SMA). Trends are determined by calculating the average daily price during a specific period of time.
- Support and Resistance Levels
- Trendlines. Trendlines are lines drawn on charts, connecting prices over time. The direction of the line indicates which way a stock may move.
- Momentum indicators. This is a measure of the rate at which stock prices rise and fall.
- Oscillators. Oscillators are rarely used alone. Usually, another technical analysis method is employed alongside it. It’s best used when trends aren’t necessarily straightforward.
Stock Selection for Trade Swinging
The critical factor in selecting an asset for swing trading is liquidity. Beyond liquidity, you want to choose stocks that aren’t excessively volatile. Your choices should have steady price action without huge moves. Ideally, the stocks you choose will be trending up or down only slightly.
Large-Cap Stocks
New swing traders may benefit by starting with large-cap stocks. Large-cap stocks are appealing because they’re shares of larger companies. They receive excellent analyst coverage, which is a benefit for new investors as well. These companies tend to have many shares that are changing hands often, so they’re generally easy to buy- and later sell.
Usually, large-cap stock companies have a solid history, are reputable, and have reliable earnings, all of which translate to stability. Stability results in steady dividend payouts. Further, volatility is relatively low.
Swing Trading Strategies
Candlestick Charts
Candlestick charts can be created for any period of time, ranging from monthly to as little as one minute. Candlesticks are very similar to bar charts but provide the information in a different form.
It provides the difference between open and close, which is also called the real body, the amount the stock went above the real body, and the amount it went below the real body. White candles indicate that the stock finished in the positive.
Candlesticks are particularly useful for spotting trends. A quick glimpse will clearly demonstrate if the stock is trending up based on the color of the candle. Where candlestick charts shine is the ability to spot reversals if careful attention is given. Detecting reversals keys swing traders to take action.
Fibonacci Retracement
The Fibonacci Retracement is one of the more complex strategies but is very effective in forecasting price targets. In very basic summary, a trend line is drawn between two extreme points.
The difference between the two extreme points is multiplied by Fibonacci ratios. The most common of these ratios are 38.2% and 61.8%.
If measuring a decline, add the low. Similarly, if calculating an incline, subtract the high.
The resulting figures serve as your target resistance during a rebound or support during a correction. Fibonacci Retracement is exceptionally fluid and can be used as a strategy for nearly any time frame.
Momentum Trading
Moment trading is based on one principle: buy high and sell higher. The investor purchases the stock as it begins to trend upward and then sells when it appears to have reached its peak. Momentum traders run the risk of taking on a position too early and/or closing out too late.
T-Line Trading
Trigger line, or T-line, is used to signal a trader to buy or sell based on a moving average plotted by a moving average convergence divergence or MACD. T-Lines default to a nine period exponential moving average, also referred to as EMA, but EMA can be adjusted according to the trader’s preference and strategy.
When the MACD crosses the trigger line, the trader would use that opportunity to enter or exit. Above the trigger line would signal time to buy. Below the trigger line would indicate to sell.
Swing Trading vs Day Trading
The primary difference between swing trading and day trading is the length of time the trader holds the position. As discussed earlier, swing trading involves holding a position over the course of several days and weeks.
Day trading, on the other hand, is completing dozens of trades per day. The goal of day trading is multiple small profits throughout the day and avoiding holding positions overnight. When executed correctly, greater gains can be achieved with swing trading rather than day trading.
Further, swing traders are not held to the same strict rules by FINRA (Financial Industry Regulatory Authority) as day traders are. Day traders are limited to the number of trades they can complete in a five day period unless they have an account balance of no less than $25,000. Swing traders generally hold stocks overnight, circumventing the FINRA rule.
Holding stocks overnight can be risky for swing traders, however. Holding overnight exposes the trader to unpredictable external factors after the close of trading. Sometimes, these factors could lead to substantially different prices the following day.
Author’s Recommendations: Top Trading and Investment Resources To Consider
Before concluding this article, I wanted to share few trading and investment resources that I have vetted, with the help of 50+ consistently profitable traders, for you. I am confident that you will greatly benefit in your trading journey by considering one or more of these resources.
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Conclusion
Swing trading is a good option for beginner traders. Lower starting capital, less demanding, and fewer restrictions attract beginners. As you become more experienced, you may choose to continue swing trading.
BEFORE YOU GO: Don’t forget to check out my latest article – ‘Exploring Social Trading: Community, Profit, and Collaboration’. I surveyed 1500+ traders to identify the impact social trading can have on your trading performance, and shared all my findings in this article. No matter where you are in your trading journey today, I am confident that you will find this article helpful!
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