Swing Trading for Beginners: A Step-by-Step Guide | Pepperstone (2024)

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Swing trading is a popular trading approach for those interested in spending less time in front of the screen or simply don’t have the time to do so. It’s considered a short-medium term strategy with positions held anywhere from a few days to a few weeks. Those who are swing trading are less bothered by the day to day market moves and more focused on the bigger picture which is driven by bigger themes and headlines.

In this guide, we will introduce you to the basics of this trading style, its benefits for novice traders, the essential knowledge you need to get started, and some of the most common strategies and tactics. By the end of this guide, you will have a solid foundation to start your journey and find swing trading opportunities in any market condition.As always, you should consider if swing trading is right for you before you embark on your trading journey.

Benefits of Swing Trading for Novice Traders

Swing trading has many advantages for novice traders who are looking to make potential returns in the stock market. Unlike day trading, which requires you to stay glued to your screen and react quickly to every price movement, swing trading allows you to have more flexibility and freedom in your schedule. You can check your positions once or twice a day, or even less frequently, depending on your time frame and strategy.

Swing trading teaches you patience and discipline. It requires you to have a clear plan for entering and exiting trades, as well as sticking to your rules and risk management. You have to wait for the right opportunities to enter a trade, and resist the temptation to exit too early or too late. You also have to accept losses as part of the game, and learn from your mistakes. These skills are essential for any novice and professional trader, and swing trading can help you develop them.

While swing trading may offer more flexibility, it’s important to remember that it also comes with bigger risks and rewards, usually in the form of bigger targets and stop losses. It’s important to consider the risks involved before trading.

Essential Knowledge to Start Swing Trading

Before you dive into swing trading, you need to have some basic knowledge of the market conditions and the financial markets that affect stock prices. You also need to understand the difference between fundamental analysis and technical analysis, and how they can help you find swing trading opportunities.

Short Overview Of Market Conditions and Financial Markets

Market conditions refer to the overall state of the economy and the stock market, which can influence the supply and demand of stocks. Market conditions can be bullish (rising), bearish (falling), or sideways (flat). Different market conditions require different swing trading strategies and tactics.

Stock exchanges are the places where stocks are traded, such as the New York Stock Exchange (NYSE) or the Nasdaq. They are affected by various factors, such as economic indicators (e.g., GDP, inflation, unemployment), interest rates (e.g., Federal Reserve policy), political events (e.g., elections, wars), and global events (e.g., pandemics, natural disasters).

The depth and velocity of market moves highly depend on the magnitude of the event and how investors perceive it. This, in turn, creates opportunities for swing traders.

Fundamental Analysis or Technical Analysis?

Fundamental analysis is the study of the intrinsic value of a stock based on its financial performance, growth potential, competitive advantage, industry outlook, etc. Fundamental analysts use various tools, such as financial statements, earnings reports, analyst ratings, etc., to evaluate a stock's worth and compare it with its current market price.

Technical analysis is the study of the price action and patterns of a stock based on historical data. Technical analysts use various tools, such as charts, indicators, trend lines, support and resistance levels, etc., to identify patterns and signals that indicate future price movements.

Both fundamental analysis and technical analysis have their strengths and weaknesses for swing trading. Fundamental analysis can help you find undervalued or overvalued stocks that have long-term potential or risk. However, fundamental analysis can be time-consuming and subjective, and it may not reflect the short-term fluctuations caused by market conditions or news events.

Technical analysis can help you find entry and exit points for trades based on price movements and signals. However, technical analysis can be complex and confusing, and it may not account for the underlying value or quality of a stock.

One approach for swing trading is to integrate both fundamental analysis and technical analysis.You can use fundamental analysis to filter out stocks that have strong fundamentals or weak fundamentals, depending on your strategy. Then you can use technical analysis to find optimal entry and exit points based on price action and indicators.

Using Technical Indicators To Identify Swing Trading Opportunities

As we have discussed before, technical analysis is important in helping you pinpoint an optimal entry and exit for your swing trading positions. There are a variety of indicators that traders can use. Beginner traders may look at trying one at a time or combining a few and over time, as they gain more knowledge and experience, they will narrow down the selection and eventually find the right settings that work for them and their strategy.

Let’s take a look at some of the most common indicators and how they can be used for swing trading:

• Moving averages (MA): Moving averages are lines that smooth out the price data over a specified period of time, such as 10, 50, or 200 days. Moving averages can show the direction and strength of the trend, as well as provide support and resistance levels. Swing traders can use moving averages to identify trend changes, crossovers, and pullbacks.
• Relative strength index (RSI): Relative strength index is an oscillator that measures the speed and magnitude of price movements on a scale of 0 to 100. RSI can indicate whether the market is overbought or oversold, as well as divergence and convergence signals. Swing traders can use RSI to identify potential reversals and entry points.
• Stochastic oscillator: Stochastic oscillator is another oscillator that compares the closing price of an asset with its price range over a given period of time, such as 14 days. Stochastic oscillator can also indicate whether the market is overbought or oversold, as well as divergence and convergence signals. Swing traders can use stochastic oscillator to identify momentum shifts and entry points.
• Bollinger bands: Bollinger bands are bands that surround the price data with a simple moving average in the middle and two standard deviations above and below. Bollinger bands can show the volatility and range of the market, as well as provide support and resistance levels. Swing traders can use Bollinger bands to identify breakouts, squeezes, and reversals.

These are just some examples of technical indicators that swing traders can use to identify trading opportunities. However, technical indicators are not infallible, and they should be used in conjunction with other factors, such as fundamental analysis, risk management, and trading psychology. Swing trading requires patience, discipline, and practice to master.

Tactics for Swing Trading

Once you have identified potential opportunities that suit your swing trading style and strategy, you need to apply some tactics to enter and exit trades effectively. Here’s a guide on how to approach potential trades:

• Identify the long-term and short-term trends of a potential stock you are watching. It’s important to make sure everything aligns and your opportunity is not far-fetched.
• Highlight your levels which will help you enter and exit the market. Some tools you can use include Fibonacci retracements and round figures.
• Start pinpointing the area you want to enter. Once you have it in mind, look for potential signs that the trend is continuing such as certain candlestick patterns or chart patterns like flags or triangles.
• After entering your trade, place your stop loss and your target and follow up occasionally to make sure your trade is going according to plan. Always be mindful of major news or large shifts in themes that could affect the overall trend of a stock.