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Swing Trading Fundamentals: How to Optimise Your Trades

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What Is Swing Trading?

Swing trading is a trading strategy where positions are held for several days or weeks to capture short- to medium-term gains in financial securities. Swing traders primarily rely on technical analysis for their trading decisions.

Most swing traders, particularly those who focus on fundamentals, find this approach effective because changes in corporate fundamentals can quickly impact stock prices, leading to potential profits. Swing trading sits between day trading and trend trading in terms of the holding period and potential profits.

Key Differences:

- Day Trading: Involves holding positions for less than a day, typically resulting in lower profits per transaction.

- Swing Trading: Positions are held for days to weeks, offering higher profits per transaction than day trading but lower than trend trading.

- Trend Trading: Involves holding positions for the longest periods, often yielding the highest profits per position due to lower transaction volumes.

Key Points:

  • Intermediate Strategy: Swing trading is a middle ground between day trading and trend trading.

  • Holding Period: Positions are held for several days to weeks with the aim of capturing profits.

  • Stock Selection: Successful swing trading depends on choosing the right stocks, which should be volatile and liquid.

  • Market Conditions: Swing trading strategies vary depending on market conditions.

  • Technical Analysis: Swing trading relies heavily on technical analysis, including understanding price channels and moving averages.

Choosing the Right Stocks for Swing Trading

Selecting the appropriate stocks is crucial for successful swing trading. Key factors include liquidity and volatility.

  • Liquidity: Large-cap stocks, which are actively traded on major exchanges, are ideal due to their high transaction volumes. Stocks with poor liquidity can be hard to sell without substantial price discounts.

  • Volatility: Price movement is essential for profits. While often seen negatively, volatility creates opportunities for swing traders to capitalize on stock price appreciations. Highly volatile stocks are usually the best candidates for swing trading.

The Right Market Conditions

Financial markets can be broadly categorized into three long-term trends: bear markets, bull markets, and neutral markets. Swing trading strategies need to adapt to each environment.

Bear Market Swing Trading:

Bear market swing trading is one of the more challenging approaches for straightforward buying and selling. In a declining market, stock prices tend to fall over the long term, making it unwise to purchase a security and hold it in hopes of price increases. However, there are several strategies to navigate this situation:

  • Shorten Trade Periods: Hold securities for shorter periods.

  • Hold More Cash: Keep some capital reserved for potential declines.

  • Use Options: Consider buying puts to profit from declining prices.

Bull Market Swing Trading:

In contrast to bear markets, trading in bull markets can be simpler. Since prices generally rise in these conditions, buying a security and realizing a profit shortly after is more straightforward. However, there are several considerations to keep in mind when swing trading in bull markets:

  • Higher Entry Points: Be prepared for higher security prices.

  • Avoid Bad Habits: Continue thorough research despite generally rising prices.

  • Consider Leverage: Using leverage is not for everyone, but if you are confident in the appreciation of the markets, you may be able to multiply your gains.

Neutral Market Swing Trading

Optimal swing trading conditions arise when financial markets are moving sideways. The most favourable opportunities for swing trading typically occur during transitions between bear and bull markets or amid widespread market uncertainty.

  • Embrace Volatility: Volatility in both directions offers the best swing trading opportunities.

  • Safety in Neutrality: Neutral conditions can minimize losses if trades don’t go as planned.

Technical Tools for Swing Trading

Exponential Moving Average (EMA):

Simple moving averages (SMAs) help identify support and resistance levels and reveal bullish and bearish patterns. These levels are crucial for deciding trading actions, while bullish and bearish crossovers indicate optimal points for entering and exiting trades.

The EMA is a refined version of the SMA that gives more weight to recent data points, providing quicker and clearer trend signals for entry and exit points. In swing trading, EMA crossovers are particularly useful for timing these decisions.

  • EMA Crossover System: Uses 9, 13, and 50-period EMAs to identify entry and exit points.

  • Bullish Crossover: Signals a potential uptrend when the price crosses above these EMAs.

  • Bearish Crossover: Signals a potential downtrend when the price falls below these EMAs.

Using Baseline Value:

Extensive research on historical data shows that in markets favourable for swing trading, liquid stocks typically oscillate around a baseline value, depicted on a chart using an EMA. Swing traders use the EMA to identify this baseline and then take long positions when the stock rises above it and short positions when it falls below.

Swing traders usually aim for consistent gains rather than seeking to perfectly time buying at the bottom or selling at the top. Ideally, they wait for the stock to reach its baseline and confirm its direction before making a trade.

However, when there is a strong uptrend or downtrend, the strategy becomes more complex. In such cases, a trader might go long when the stock dips below its EMA, anticipating it will rise again in an uptrend, or short a stock that moves above the EMA, expecting it to fall if the longer trend is downward.


To maximize profits, aim to exit trades near the upper or lower channel lines, but avoid being too precise, which might lead to missed opportunities. In strong market conditions, wait for the channel line to be reached; in weaker markets, consider exiting earlier.

Potential Earnings and Risks

Earnings: Swing trading can be lucrative but typically involves holding positions for days or weeks.

Risks: Swing trading is generally less risky than other short-term trading forms, but success depends on accurately timing entry and exit points. Misjudgements can lead to capital loss.


Swing trading is an excellent way for novice traders to start learning the ropes. It also holds substantial profit potential for more experienced traders. Swing traders benefit from timely feedback on their trades, typically within a few days, which helps maintain their motivation. The holding periods for their positions, lasting several days, are long enough to avoid constant monitoring but short enough to keep them engaged.

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