How do swing traders make money?
In swing trading, traders take short-term bets with a holding period ranging from a few days to weeks.
The style is called swing trading because traders swing from one position to another, accumulating small profits that add up to bigger profits in a given period.
For example, a swing trader can take 5 trades in a week making a 5% return on each trade to make a 27% return on his trading capital. That’s assuming he is right 100% of the time. In a more reasonable scenario, if the trader is right half the time, and loses 2.5% on each losing trade, the return would amount to 5.4%. That may not sound much, but considering it’s a weekly return, the longer-term returns will be eye-popping due to the effect of compounding.
In fact, a 5% weekly return, compounded, would result in a 10,000 account balance turning into over 126,000 at week 52.
Swing Trading Strategies
Different swing traders deploy different strategies to capture the short-term moves in prices. New traders generally do a lot of trial and error using different strategies and form their strategy that suits their individual preferences.
While most of the trading in swing trading can be dependent on charts and technical analysis, traders with medium-term horizons and higher return objectives also follow fundamentals to have a better conviction on a trade.
Swing trading strategies can be broadly classified into three kinds.
- Range Based
In range-based strategies, traders identify stocks that move to and fro within a range. You can use chart patterns, trend lines, indicators like moving averages, RSI, MACD, or Bollinger bands to zero in on a range. Once the range is established you can go long at the lower end of the range and short at the upper end of the range.
Such ranges can be established in boring, out of favour stocks that are not trending for a long time. The ranges wouldn’t hold true if something changes significantly with the stock.
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- Reversal based
In reversal-based trading strategies, you can look for stocks that are either overbought or oversold and are ripe for reversal. Trading reversals is not as straightforward as it sounds because stocks tend to remain overbought or oversold for extended periods.
Therefore, traders may not want to short a stock right at the top or buy at the bottom. Instead, they would try to enter only when there is enough evidence of the price having been reversed.