Getting into trading can be challenging, especially for beginners.
Many factors and variables are involved, and all of them will inevitably become overwhelming for any beginner.
To overcome them, you need to focus on easier trading techniques. Swing trading for beginners is an excellent choice because it is a fundamental trading technique.
Therefore, this article aims to help you master swing trading as a beginner. Let’s begin!
The Basics - Swing Trading For Beginners
Swing trading is a technique of buying and selling assets or securities based on how their prices “swing” or move upwards or downwards in a given period.
A swing trader often buys or sells assets and commodities for short to mid-term periods, where they can make potentially large profits.
Constant technical analysis is essential in this type of trading, which is why many swing traders also rely on charts, patterns, and strategies to win big profits.
A thing to note is that swing trading is different from day trading. Swing trading, as a category, falls between day trading and position trading. We will make a clear distinction between the two in the following section.
How Swing Trading Compares to Day Trading
Even though swing and day traders use similar trading strategies, there are significant differences between the two trading types.
The first noticeable difference is the time it takes for a day trader vs. a swing trader to hold their trading positions.
As the name suggests, day traders usually do all their trading within one day. On the other hand, swing traders can hold a position for several days or weeks.
The second difference is the attention that each trading type requires. Since day traders must make multiple trades every day, they must devote their full attention to constant analysis and tracking of price movements.
On the other hand, swing traders trade periodically, making it a more relaxed type of trading. The third difference between day and swing trading is the potential profit and cost.
As far as profit is concerned, swing trading can provide you with higher yields but at a slower pace, while day trading is more beneficial for smaller but quicker gains.
The costs of swing trading are also lower than those of day trading. That is because there are fewer transactions with swing trading, which reduces commissions.
Advantages and Disadvantages of Swing Trading
Before we get into more details about swing trading, let’s first look at its advantages and disadvantages.
Advantages
- It is a more relaxing way to trade, not needing to devote your constant attention.
- You can define the trading positions and assign stop-loss margins.
- The trading process has a slower pace, which gives you time to think and deeply analyze the shifting of prices.
- The potential profits can be significant if you know how to strategize and read charts.
- Your capital is not bound to a single asset or security for long, so you can always move or retract your funds with a minimum loss if the trade is not going well.
Disadvantages
- Extensive knowledge and experience using technical analysis are required to recognize high-profit investments.
- Unlike day trading, trading positions are held open for several days or weeks, which may lead to price collapses and more significant losses.
- The potential for higher losses makes swing trading a stressful occupation.
- Swing trading minimizes the loss, but when you retract your capital, you may also lose a chance for higher long-term profits.
How Much Capital Do You Need to Swing Trade?
The good thing about swing trading is that it requires little money as an initial investment.
A few hundred dollars are all it takes to start your best swing trading journey. But the exact amount mainly depends on the price of the security or asset that you wish to buy, the fees, and the commissions.
The correlation between the prices and your budget
Your budget will determine what security or asset you buy based on its price. But depending on the price, you may also need to calculate the risk of involvement.
For example, if you purchase a stock for $300 and wish to stop your losses at $250, you only risk $50 of the invested amount.
Another example is when you have just enough money to purchase a security or asset. This is fine, but you must consider the expenses (commissions and fees), for which you need more “money in the bank.” Let’s take a look at them next.
The correlation between the expenses and your budget
To start swing trading, you will need the help of an online brokerage, which naturally involves fees and commissions. They are considered swing trading expenses and may substantially cut your profits if you’re not careful.
For example, if you’re making a $2 profit per share on a specific stock, but your expenses amount to $1.5 on that share, then you are only left with $0.5 profit, which is not worth the investment or risk.
Beginners Guide - How to Get Into Swing Trading
You now know some of the essential characteristics of swing trading, its pros and cons, and how much money you would need to start.
In this section, which is probably the main one in this article, we will cover the general process of getting into swing trading.
Find stocks for swing trading
The first thing is to find some of the best securities or assets suitable for swing trading. Stocks are an excellent choice when swing trading for beginners is concerned. That is why we will mention them often as an example further down the article.
However, choosing stocks is not a random process; it depends on factors like volume, volatility, and performance in trading sectors.
Volume
A stock’s volume is one of its most essential characteristics. It implies how many shares of that stock are traded daily, weekly, or monthly.
As a new trader, you should be especially aware of a stock’s volume. New traders often make the mistake of choosing low-volume stocks because they are traded for less money.
Volume is linked to liquidity, or how easily a stock can be purchased or sold on the market. The most liquid asset is cash because everyone constantly exchanges money for other values.
A high volume, more liquid stock or asset will give you higher profits as a beginner. There will be more shares of a stock available for purchase, which means you don’t have to re-purchase shares from other investors to fill a certain margin.
Volatility
Volatility is also an important factor when choosing swing trading stocks. It implies the range in which a stock price can change in a given period. The higher the range between the highest and the lowest price, the higher the volatility, and vice versa.
Choosing high or low-volatility price stocks depends on technical analysis, market performance, and over-time progress.
High-volatility price stocks are more beneficial for swing trading, but that doesn’t mean low-volatility ones can’t be as well. Stock volatility is often measured using Bollinger Bands or ADX indicators.
Performance
Just as companies operate in separate market sectors, their stocks will also differ in those sectors. That difference between stocks is indicated by performance.
Therefore, the performance of a stock is how you determine if it is suitable for your trading strategy.
A stock from a company in the financial sector will perform differently than one in the commodities sector. For example, the first can have more extensive volume and higher volatility, while the latter will have a lesser volume and lower volatility.
Investing in one will provide different results and profits than investing in the other. This is why you should measure a stock’s performance.
A stock’s performance is often measured using the price-to-earnings ratio(P/E), the earnings per share (EPS), or the dividend income.
Determine a swing trading strategy
The next thing to do is to choose and implement a swing trading strategy. Swing trading for beginners without the right approach and plan can be overwhelming. Here are some common swing trading strategies that many traders use:
The support and resistance levels strategy
This is one of the most common strategies that swing traders constantly use. The support and resistance levels, or triggers, represent lines on a chart where you stop your loss and take your profit.
A support line indicates the low points, where the price has significantly dropped, and it's an excellent time to buy the shares of stock. However, it can also indicate the line (price) where you should sell the shares of stock to minimize your losses as much as possible.
On the other hand, the resistance line indicates the high points on the chart, where the prices rise to a potential maximum before starting their decline. It is a pointer that you should sell already purchased shares to gain a maximum profit.
Nevertheless, it can also point to a stable trend, after which the prices may rise again, which means sellers sell new shares. In this case, the prudent thing to do is to be patient and take a risk for a higher profit.
The Fibonacci retracements strategy
Using the Fibonacci retracements strategy, you can identify the support and resistance levels we mentioned in the previous section. Identifying these levels will help you predict certain reversals in the price of a stock, resulting in on-time investments and eventual profit.
The Fibonacci retracements strategy states that stock prices tend to retrace at predetermined percentages within a trend before continuing their upward or downward movement.
According to this strategy, significant reversals often happen around 23.5%, 38.2%, 50%, and 61.8% Fibonacci ratios. Many traders also claim that the 161.8% ratio is a crucial point for reversals.
Using these ratios is an excellent starting point for defining support and resistance levels in your trading charts.
The channel strategy
The channel trading strategy also uses support and resistance lines, but they are parallel, forming an invisible channel.
Traders use this invisible channel, created based on the stock price movements, to analyze and predict the best times to enter and exit a trade.
The good thing about the channel strategy is that the price trend can go either upward or downwards without any major surprises in the long run. It is only a matter of identifying the channel and making a profit.
The MACD strategy
If you’re a complete beginner, we recommend you start with this strategy. It is simple to follow, and you can quickly identify buying and selling opportunities on the price chart.
The MACD strategy is based on two lines called moving averages. One line is called the MACD line, and the other is called the signal line.
When these two lines cross, buying or selling signals are generated. If the MACD line is over the signal line, that indicates a good time to buy shares. However, if the MACD line is below the signal line, that is an excellent selling opportunity.
As you can see, using the MACD strategy is easy because it guides every step. It is a great way to get accustomed to chart patterns and learn how to analyze them by yourself.
Choose a swing trading platform
As mentioned in this article, you need to find an online platform or brokerage to start as a swing trader. A trading platform is where you will monitor and execute all of your trading activities.
There are many free platforms available to choose from online. But almost any trustworthy and reliable platform will require either a subscription or a small commission from every profit you make.
Choosing a platform that only charges a small subscription is better. You can make large profits and only pay a fixed fee amount.
An excellent platform for swing trading for beginners is Foolproof Options. It specializes in options trading. They are, in fact, contracts that allow you to purchase stock shares.
Foolproof Options is an ideal beginner-friendly platform that offers a monthly subscription and a 14-day free trial period. It sends you three weekly alerts directly on your smartphone, so you will always know how your investment is performing.
Start trading and record your progress
Now that you’ve found the stocks you wish to trade with and chosen the right strategy and online platform, it's time to start trading. Here are several things you need to do along the way.
Start slow and control your emotions
An important thing to remember is to start slow and control your emotions. Trading can often become emotional, especially when you feel that there is a big win ahead of you. This is called impulsive trading, which can become a terrible habit for beginners.
Starting slow means going easy on your budget, as well as your time. Begin with a small investment, for 10-15 minutes each day, which is more than enough time to monitor your investment. Then, as you progress further, you will increase the budget and time invested if needed.
Make swing trading a positive habit and stay organized
As you progress through your swing trading journey, you will start to make it an everyday activity. You must ensure that it becomes a positive habit, not an addiction.
Swing trading should be both fun and profitable at the same time. Otherwise, it will only cause you unnecessary stress.
Staying organized is also crucial. Keep track of the stocks you trade with, and write down your profits and losses. That will give you material for future analysis to see where to improve your trading.
Try to trade a variety of stocks and use a stop loss
You may assume that trading only 2-3 stocks is better and safer than trading, say, 8-10. While that is logical, the better option is the opposite.
In other words, trading with various stocks may bring you more significant profits and make up for the losses you sustain on some of them. That is why it’s a good idea to start trading with multiple open positions while applying different strategies.
An excellent choice while trading multiple stocks is to use stop loss as often as possible. Stop loss will benefit you as a beginner because it will minimize your losses until you learn to properly read and evaluate the trading charts.
Note that you should practice putting the stop loss as far away from the entry point as possible to maximize your profits.
Conclusion
Congratulations, you now know all the basics of this trading technique.
We hope this article has helped you understand swing trading for beginners and that you will positively master this trading technique. It is one of the best starting points for beginners and a great way to earn a potentially high income.
Good luck and happy trading!