What trader are you ?–Swing Trader

“Bull markets are born on pessimism, grow on skepticism, mature on optimism, and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.” – Sir John Templeton

Swing trading is a form of short-term trading seeking to maximize profits and minimize risks. Swing traders identify the trends established and try to ride the swing, in the direction of the trend. A swing trader must be very cautious in identifying the beginning of the trend, so as to reap as much profits as he can by riding the swing.

As said by Sir John Templeton, swing traders are to identify the time of maximum pessimism and maximum optimism. And, the question lies here – How does a swing trader identify the trend.

A swing trader needs to approach the market cautiously, else the consequences are a disaster for the entire trading journal. A swing trader needs to have basic yet complete understanding of the technical aspects of chart reading so as to identify the trend right during its inception. Nevertheless, the basic swing trading method is that - Most Swing Traders assume the "Trend is your Friend" and trade with the main trend of the chart. If the security is in an uptrend, the online trader will "go long" that security by buying shares, call options, or futures contracts. If the overall trend is down, then the trader could short shares or futures contracts, or buy put options.

A trending stock rarely moves in a straight line, except during the initial and final phases of the trend. Trends form in a step like pattern and identifying the supports and resistance of a particular security or stock will help the swing trader to take formidable positions in order to pocket the gains. The below chart shows a step by step formation of a bullish trend and the swing trader takes up a position at every support and gets out of it every now and then to book the profits or when he observes that the swing has come to an end.

Pros:

• highly profitable.
• less holding period, ranging from 2 to 10 days.
• Technically sound trader can make profits multiple times during a stock’s trending phase.
• Multiple entry points available, so a chance to make profits always exists.

Cons:

• Disastrous if the entry is wrong.
• Possibility of blowing out the whole account in a single misplaced trade.
• Difficult to identify the trend during its inception.
• Not always profitable if the entry or exit is not made at the right time.
• Demands more psychological strength when compared to seasonal trader/long term investor.

There are three phases of swing trading, which a trader should be familiarized with.

1. Identifying the trend,
2. Riding the trend
3. Exit or booking the profits.

The next post will let you know how a swing trader should be able to identify the bullish and bearish trend and ride the swing, exit at the maximum profitable point. Get back here to know that.

Until then, “Happy Trading”

Images courtesy: Google.