How to Select Stock for Swing Trading?

Traders use different strategies and timeframes to make the most possible profits from the stock markets. One such popular strategy that can offer high returns in the short to medium term is Swing trading.

If you follow sports like cricket or baseball, understanding swing trading is simple. Just like it’s important to choose the right balls to swing the bat, the essence of swing trading is to pick the right stocks. In short, some stocks perform better than others during a specific period. There can be different reasons for this, but the main aim is to identify such stocks.

In this blog, we will discuss how to select stocks for swing trading and the criteria you should follow to identify these stocks. We will also discuss essential tips that will help you select the stocks to buy for swing trading.

Understanding Swing Trading Basics

To understand how to choose a stock for swing trading, you should first understand the purpose and timeframe of swing traders. Usually, you will see swing traders buying and holding a stock short to medium term. This can be for a few days or even several weeks.

The purpose of swing trading is to capitalize on the short-term price swings in a stock. There are 3 main types of strategies used by traders:

• Intraday: When the traders square off their positions, both short and long, within a trading day, it is called intraday trading.
• Swing Trading: When traders invest in a stock for the short to medium term to benefit from swing price movements. Instead of focusing on daily price fluctuations, traders bet on the overall growth prospects of a stock during a period.
• Trend Trading: When traders follow a trend and take positions to benefit from it. They hold their positions until the trend continues. Once they get the indications of trend reversals, they square off their positions or take new positions.

Also Read: Trading for Living

Key Stock Selection Criteria for Swing Trading

To become a successful swing trader, you should learn to analyze stocks and choose the best ones for swing trading. Now, you will ask how to select stocks for swing trading. Here are 5 major criteria and factors you should use to select the best swing trading stocks.

Market Trends

The first step you should follow is to analyze the current market trends. Choose the sectors that are performing well and are highlighted. Here’s how you can identify them:

• Government-backed sectors.
• Political stability.
• Geopolitical conditions.
• Sectors focused on economic policy.
• Sectors attracting heavy investments.
• Sectors highlighted in the annual budget.
• Sectors in the best position to capitalize on current market trends.

Volatility

Usually, volatility is associated with risk. But it also gives you the opportunity to make profitable trades. If you want to make good profits from swing trading, volatility is your best friend. 

Volatility measures the percentage fluctuation in a stock’s price. Higher volatility means more risk and potential for high returns. For example, you have 2 stocks A and B.

Stock	Volatility 1 month	Risk Level	Remarks
A	10%	High	Ideal for swing trading
B	2%	Low	Not ideal for swing trading

You should choose the stocks that fit your risk appetite and provide ample potential to profit from swing trading.

Liquidity

Liquidity is one of the most important stock selection criteria for swing trading. Stocks that are traded with high volume are called liquid stocks. Why is it important? Liquidity ensures that you can easily enter and exit trades and are not stuck. Hence, it is advisable to trade in the most liquid stocks to make the most of swing trading.

Price Action and Patterns

To select the ideal stocks to buy for swing trading, you should check the historical trading data of the stock. Choose a stock that consistently forms patterns that can help identify short-term trends and reversals. Such stocks are more active and likely to provide the desired returns in swing trading.

Fundamental Analysis

Relying solely on technical analysis can land you in deep trouble. A company that is fundamentally strong is more likely to be stable. Traders prefer stocks with strong fundamentals for swing trading. Check the financial statements, ratios, and upcoming projects of the company you want to trade in. Combining technical and fundamental analysis will help you get a clear picture of the growth potential of a stock.

Best Way to Select Stocks for Swing Trading

Now, let’s discuss the tools you have at your disposal to analyze stocks. Using them is the best way to select stocks for swing trading. 

Technical Indicators

Here are some popular technical analysis tools traders can use to become successful swing traders:

• Moving Averages: You can identify the trends and reversals using moving averages. For example, the golden crossover of 50-day and 200-day SMA (Simple Moving Average) lines.
• RSI (Relative Strength Index): Usually, the RSI of a stock fluctuates between 30-70. You can identify overbought and oversold stocks using this indicator and take swing trading positions.
• MACD (Moving Average Convergence Divergence): The momentum and direction of a trend can be identified using the MACD.
• Candlestick Patterns: You can use popular candlestick patterns like symmetrical triangles, head and shoulders, flag patterns, etc, to identify potential price movements.
• Bollinger Bands: You can use Bollinger Bands to gauge the volatility in a stock’s price.

Support and Resistance Levels

Use tools like candlestick charts and trendlines to identify the strong zones of support and resistance. For example, while identifying stocks to buy for swing trading, look for stocks close to the key support zones.

Timing

Timing is everything in swing trading. It is better to enter trades at the points of key breakouts and reversals. It will help you make the most of your swing trading strategy.

Risk Management

• Stop Loss: You should always apply stop loss on your swing trades to avoid heavy losses. It can safeguard you from losses caused by wrong analysis and misinterpretation.
• Limited Exposure: Limit your exposure on a single swing trade to a small percentage, say 1-2% of your total capital. It will help you be in control.

Tools and Resources for Stock Selection

As a trader, you would be in search of reliable tools and resources to get swing trading stock recommendations. Here are some resources you should use regularly:

• Stock Screeners: You can use stock screening platforms to filter stocks based on criteria like volume, volatility, and trends.
• Trading Platforms: You can use the charts and technical analysis tools provided by the brokerage firms on their trading platforms.
• Latest News: Keep up to date with the latest news through business news channels and websites like CNBC and moneycontrol.
• Technical Analysis Tools: Use technical analysis platforms like TradingView to select the best stocks to buy for swing trading.

Also Read: Intraday Trading v/s Option Trading – Which Is Right For You?

Common Mistakes to Avoid When Selecting Stocks for Swing Trading

Whether you are a beginner or a seasoned trader, the worst mistake you can make is taking your eye off the ball. Here are some pitfalls of swing trading you should avoid at all costs:

• Ignoring the market trends: If you ignore the overall market conditions and trends while selecting your swing trading stocks, it can lead to losses.
• Overtrading: Overenthusiam is detrimental to your capital. You should avoid risking more than you can afford to lose. Also, overtrading attracts more taxes and brokerage.
• Not managing the risk: It is important to apply stop loss on your swing trades. It can safeguard your capital from erosion.
• Relying solely on one indicator: A single indicator can never be right all the time. To avoid false signals, you should always use multiple tools.
• Chasing the Hype: Avoid the hype created by speculators. If you chase the trending speculation, you can lose your money.

To Sum it up…..

Swing trading is neither as volatile as intraday trading nor is it stretched out like long-term investing. As a result, it is ideal for investors who want to make profitable trades in the small to medium term. To become a successful swing trader, you should understand how to select stock for swing trading.

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