Everything a beginner should know about swing trading is here ( one of the most profitable type of trading? )
Introduction
So learning objectives of this first part are as follows. So I'll be taking you through some basic stuff for swing trading, then I'll be doing a comparison between swing trading, positional trading,and the buy and hold approach, and then I'll be moving on to trading instruments that are available when we are trying to swing trade. The next point that I'll becovering is how swing trading fits in overall market strategy of a full time trader, then I'll be taking up whether you should adopt a system based swing trading as a technique or you should go in for a discretionary trading approach. Then there are two distinctive swing trading approach that a trader can take. One is the top down approachand the bottom up approach. I'll be telling you why the top down approach is the more preferred method to swing trade. And in the end I'll be talking about trading platform tools and your broker selection. So this part is focused on the very basics of swing trading. I do understand that not everybody is proficient with trading and investing as a topic. So, which is why I am deliberately making an attempt to start with the very basics and then build onto advanced concepts.
What is swing trading
I'll just answer this basic question, what is swing trading? So, swing trading is basically a short term trading method that you can apply to stock futures and options. In swing trading what you do is you take on positions and you kind of keep it for about two days to a few weeks. This also depends on preference of a trader. Most of the traders actually trade for a period of two days to 20 days or 10days, and that again depends on your psychological makeup as a trader. So most of the times the trades taken in swing trade are based on technical analysis concepts. But again, this is not limited to technical analysis only. In case you are following fundamental analysis very closely, so some of the concepts like earning projections or earnings estimate, these kind of triggers can be used for trade entries as well. But this would be more specific around earning seasons or major stock events.
Basic difference between swing trading , positional trading and buy and hold approach
So, I'll just coverup a basic difference of what is swing trading,positional trading, and buy and hold approach. Now, buy and hold is more applicable to investments, but I have seen in markets that there are traders out there who like to buy stocks and kind of hold them from a trading perspective also. So, which is why I have kept this buy and hold approach in sort of a trading topic as well.
- So, in swing trading as I've said it's a short term method and the positional holding period ranges from two days to about a few weeks. Positional trading, again, it's sort of a medium term method. It's not a short term method, and the time duration for a trade typically ranges between a few weeks to a few months. And buy and hold approach,obviously I told you, it's like a trader is taking up a position and keeping that position for a period of one year or a few years. Now, this happens as well because now mostly if you buy a stock for one year or more that itself categorizes as an investment, but there are some traders out there in the market who like to keep their investment portfolio separate and like to keep their trading portfolio separate, and in that trading portfolio they kind of want to hold positions for one or two years as well. So basically a swing iswhere you can clearly mark out a pivotand price either falls or rises from there. So that is the job of a swing trader. His aim is to capture the most relevant swing that is likely to happen, right? So positional trading is sort of different because a trader is more bothered about the larger price movement here. right? So the buy and hold technique is hypothetically if you're holding a position here, even if the price falls about 50% you still kind of hold that position and you don't kind of exit on every down turn as such, and you keep on holding that position 'til the relevant conditions prevail. So, this sort of technique actually requires a lot of patience and it's a completely different topic, which is why I won't go there. But swing trading and positional trading concepts are more or less the same, except for the fact that time duration of trade is much shorter in swing trading, whereas in positional trading it is much longer.
Trading instruments
So, we'll just come to the trading instruments aspect, which trading instruments are available for swing trading. Before heading forward I would just tell you that this part is a sortof theoretical part because this will actually form the building blocks for part two, three,four, and five. I don't think I wouldend at part five because this is a extremely vast subject, and I think as of now I have just planned for five parts, but I think it would easily extend up to 10 parts. So, which is why this part one is extremely crucial, because you need toget your basics right in order to understand what is going to be taught in part two, three, four, five,and so on and so forth. So the trading instruments that are available for swing trading, they kind of depend on market conditions and the trend direction and the volatility conditions. Now, these three specific aspects I'll be taking up in detail in remaining parts, that is, part two,three, four, five. But you have to remember that swing trading is sort of a short term trading method. So, which is why instrument selection is absolutely crucial here.The three most popular instruments that we have available are stocks, futures, and options. Now, in case you're a beginner, or you are trying to learn how to trade, I will tell you that you should stick to stocks when it comes to swing trading, because the risk management and position sizing is much easier in stocks,and this should be your most preferred instrument. In fact, my personal preference is always to stick with stocks as far as swing trading is concerned. Futures is the most popular instrument because at a very small margin you can actually build up pretty large positions. But it is actually also one of the instruments that leads to huge capital destruction. So, which is why I categorize this instrument as risk to reward is not that great in this futures instrument especially for beginners,because it's kind of difficult to manage risk in futures. Options is actually the most rewarding instrument, but the experience level required to manage a trade in options is quite high. It is more rewarding in terms of risk to reward, and there is a limited capital that you can lose especially if you're buying options. But again, I would still say that in case you are starting out or even you're two, three years, sort of you have experience in the market, still try and stick to stocks before you graduate to the next level. So in terms of moving up to the next level I would say that first start with stocks, then move to futures,and then finally try your hand on options, right? Because in my opinion options are one of the most trickiest instrument to trade, whether from positional perspective or swing trading perspective. I'm an options trader as well. So I trade these instruments quite frequently, which is why out of experience I'm telling you that trading options is actually pretty difficult. It's actually more lucrative because most of the brokers and advisors, if I may use the word, they kind of push retail traders to pick up positions in options,but I think you should be away from this instrument for a long time until you master how to trade stocks. Then you need to master how to trade futures and then you should move on to options. So that is how I prefer for a trader to graduate from one instrument to other. So I'll just come to this aspect which is swing trading as an overall market strategy. Now, why this is important is because I often see that traders commit a lot of money in swing trading and they're also not clear about what type of market strategy they should adopt. So, swing trading in my opinion should not form 100% of your market strategy. So my market strategy comprises of three independent strategies, which is one is swing trading, the second is positional trading, and third is investments, right? So these three sort of investment and trading techniques actually form my complete market strategy. So this, I would say that this depends on trader, because there will be occasions where a trader would feel that he's just a swing trader. He does not want to invest or he does not want to trade positionally. That is fine. But in general, if you're starting out try to classify your market strategy into three sub topics,which is positional trading, swing trading, and long term investment. Now, in positional trading you should stick to stocks and futures. In swing trading you should, you can experiment with stocks, futures, and options, and for long term investments there are a lot of options available, that is, stocks,bonds, deposits, gold, silver. The list is endless. So, if you're starting out I would say that for positional trading,which is a completely separate topic and I will cover it up once I've finished with swing trading and options trading topic,for positional trading and swing trading start with stocks first. Don't move to futures and options until and unless you sort of master how to trade stocks.
Asset allocation for beginners
So I'll just come to asset allocation when it comes to market strategy. Now this is the sort of asset allocation that I follow. Now the way I divide my capital is that I allocate about 10% capital to swing trading, then I allocate about 30%capital to positional trading, and for long term investments I allocate 60% of my money, all right? So, this is the sort of income categories that I have classified based on my psychological comfort level. So, for me, the positional trading that I do is my active income because I am a full time trader. The swing trading that I do is my passive income. That is, my life does not depend on this income. It mostly depends on positional trading. And long term investments,obviously you cannot categorize them as income because they are the sort of long term returns that you take out of the market. So the modified chart that I showed you, this is the initial chart. So, based on capital allocation this would be my market strategy. That 10% of my money goes into swing trading. About 30% goes into positional trading, and 60% of my money goes into investments, right? So, this is how I sort of divide my money when it comes to my overall market strategy. Now, understanding this, especially if you're a beginner, is important. Get into the habit ofvdividing your money into three or four segments which you prefer. You can also add one that's a fixed deposit segment or IPO segment, whatever segment you want to add based again on your comfort level. But get into the habit of allocating your money in terms of the various strategies you are going to apply in market,because not all years will pass by where all these three strategies would make you money. It would be that those years are extremely rare when you will make money in positional trading, swing trading, and long term investment at the same time. So there are times when investments won't do well, only swing trading and positional trading will do well, and then there will be time only when investments will do well, and swing trading and in positional trading you won't make that much money. So, which is why it is extremely important to allocate capital to different sort of market strategies.
So now I'll come to swing trading, when it comes to trading systems or discretionary trading. Now, trading systems is when you sort of take a set of rules and you kind of put them into a computer program and that program actually gives you entry or exit signals. Now system trading is something, it's a good thing,especially in India. As of now, you're seeing a lot of brokers providing these backend APIs through which you can sort of build your own trading systems and do kind of automation stuff, you know? You just buy and sell based on whatever triggers are coming out of your trading systems. Now, this is a good thing. But for a old school trader like me I've always preferred discretionary trading because this where my own analysis or my own reading of market comes into picture. Now, this ultimately depends on from trader to trader whether he wants to make a swing trading system or whether he wants topractice swing trading based on sort of discretionary approach where he'll be looking at charts, he'll be looking at other indicators and what the broader market is doing, and then taking a call whether he wants to trade in this environment or wants to sit out, whereas a trading system does not differentiate in any market condition,unless and until you have some advanced programming out there, which can see into the insights of what is going on in the overall market. I think a human mind isonly capable of doing that. I don't think various programs or softwares out there are capable enough of sort of replacing the insight that a human mind can have with respect to trading and overall market conditions. So, in my opinion most of the trading systems actually fail to capitalize on the human element and that forms ahuge part of trading. In case you've been in the market for one or two years you would know what I'm talking about. A trader's intuition,a trader's judgment, or his ability to foreseewhat is going to happen, I don't think there is any trading system yet that can actually replace these qualities of a trader. So, which is why I always prefer a discretionary trading approach where I want to rely on myability to read the market rather than a system's ability to exit or entry a trade. There's one more pointI want to highlight and that is indiscretionary trading your trade management is a lot better because you, at times you look at the screen and you know thatin case you are long you know that a sudden selling pressure comes into the marketyou can immediately, based on your intuitive skills,you can exit that trade. But that does not happenin a trading system, which is why my personal bias is always towardsdiscretionary trading, but I leave it up toyou whether you want to follow this approachor you want to prefer something like a automated trading system. That is also fine,because there are traders who get wonderful results out of a trading system because they remove their emotions out of their participation in the market. So that also works. I'm not saying that does not work. But I personally prefer to be completely involved in trading and I believe that there is no system out there that can actually replace your ability to read the overall market.
Trading approaches
So now we come to our trading approach. Now as we'll be covering up more & more parts in swing trading you would see more of this in detail. So there are two sorts of approach that you can follow. One is the top down approach and another one is thebottom up approach. Now I have a completely different part for the top down approach. In top down approach is what happens is we start with the broader market index, then we move on tosector, and then we kind of pick individual stocks. So this approach is amore holistic approach. In my opinion, you get more high probability trades when you sort of follow this approach rather than bottom up approach where you don't look at the index,you don't look at sectors, you simply go to,you simply follow a stock specific approach and you pick up stocks for swing trading. Now, luckily I am doing this swing trading series in the kind of market environment which is not conducive for long trades. There are many stocks that are available for swing trading as of now on the long side, but look what will happen. If you are doing the bottom up approach you'll be selecting stocks for a long trade but the overall contextor the overall direction of the market at leastfor the short term has been down and volatile, and which is why I think you will have more whipsaws if you sort of followbottom up approach, that is stock specific approach, in current market conditions. So I hope my point is clear, which is why if you start with top down approach that is you take the trend of index then you move to trend of sectors and then you pick outstocks from those sectors in the direction of trend and I feel the probability of picking out winning trades is more. So personally I practice this top down approach and that is what I'll be showing you in subsequent parts. So before ending this part I'll just take up the subject of platform,tools, and broker. Now again, I've taken up this very basic topic because traders out thereare not familiar with basic concepts and these things also need to be covered in depth.
Trading platforms
Now, by trading platform I mean technical analysis softwares or a web based technicalch art platform. Now for swing trading I think both of them can work. In case you have a technical software, that's great. You can actually customize your indicators, have a pre screen ready. Every morning you can get up and directly pick out trades from that software. A web based system, web based technical chart platform does have some drawbacks,but in case you don't want to invest ina stock software, then that's completely fine. That does not matter. When it comes to tools I would still maintain that a proper technical analysis software has more tools and more sort of ability for you to manage or read your analysis well, just because of theamount of, or the volume of tools that are available on a proper technical analysis software. You can pick out anys oftware you want. I personally use Ninja trader,Ami broker, Market Delta. So it's completely up to you in case you want to.
Choosing a broker
The most important topic that I want to focus on is broker. Now quite often for swing trading I think I will encourage you to go out and pick out a discount broker that is a low cost broker because margins as such are low when it comes to swing trading profits. But do your research properly while picking out a broker, especially have a different account for positional trading and investment, because have a full time account or a full time service brokers are there. Keep your positional trading and investment portfolio with them. As far as swing trading portfolio is concerned you can maintain thatwith a low cost broker. Try and research on the kind of broker you're choosing from because especially on event heavy days you do tend to see that these low cost brokers kind of, their system freezes. The orders don't go through. So these are the sort of things you need to consider before trying to shortlist a low cost broker. So, do your research well. There are a lot of social platforms available where you will come to know whether on an event day that particular broker his system froze or not. What about his customer service when such things happen? You need to sort of take those things into account as well. So, keep a sort of prize on your account that you're going tohand over to your broker. Don't think that you have a small account today which is why you need to compromise onthis broker aspect. Today you might be small but tomorrow you may grow into a very big trader. So, which is why always, value yourself more, and ask questions to your broker before trying to sign up. Have a demo of histrading platform. See whether his systemsare capable enough to handle an event heavy day, and only then you will go out and pick out a broker.
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