A Comprehensive Guide to Swing Trading: Basics, Tips, and Examples

Here are three key takeaways from this post:

1. Swing trading involves picking a fundamentally decent stock with a clear exit target in mind.
2. We discuss five types of market swings: technical, sector, segment-based, macro-focused, and business cycle or value migration swings.
3. Examples of successful swing trades include investments in Nifty IT, HDFC AMC, and Punjab National Bank.

What is Swing Trading?

Swing trading is a strategy where an investor selects a fundamentally decent, if not great, stock with a clear exit target. It differs from investing in the sense that while long-term investors hold fundamentally strong company shares for the long haul, swing traders aim to flip stock holdings within a shorter timeframe.

Five Types of Market Swings

Swing trades often revolve around five common market movements.

• Technical swings: These revolve around identifying chart patterns and predicting share price changes based on that.

• Sector swings: Sectors that have seen large amounts of money flowing in might see a pullback as money rotates to beaten-down sectors. An example of a sector swing would be the recent interest in banking stocks as the sector shakes off a slowdown.

• Segment-based swings: Occasionally, there's a catch-up game within specific segments of the same sector. For instance, in the banking sector, some stocks like SBI may see higher growth rates compared to others like PNB.

• Macro swings or tailwinds/headwinds: External macroeconomic factors can give a boost (tailwind) or create a drag (headwind) on specific sectors. For instance, a rise in insurance penetration due to increased financial literacy and discretionary spending could be a tailwind for the insurance sector.

• Business cycle or value migration swings: Stages in a business cycle or shifts in value from one type of business to another can be leveraged for swing trades. An example of value migration is the shift from conventional automotives to electric vehicles.

Swing Trading: Stock Examples

• Nifty IT: Nifty IT is still technically sound, and according to technical patterns, it's set for an upward run.

• HDFC AMC: With a clear reverse head and shoulder pattern in its charts, HDFC AMC has a technical sell target of around 3,000.

• Punjab National Bank (PNB): PNB is an example of a successful swing trade where clear exit targets were identified and acted upon. Now, it still has some way to go before reaching its book value target.

Building a Portfolio using Swing Trading

Swing Trading is not only about selecting individual stocks; it’s also about how these stocks are pulled together to create a strong portfolio. To successfully swing trade, investors need to consider various factors including sector rotation, tailwinds/headwinds, and market swings. All these factors combined give a clear understanding of when to enter and exit a swing trade.