what is swing trading. How it’s work.

what is swing trading. How it’s work. Swing trading is a short-term investing technique in which you hold stocks, currencies, or other financial instruments for a period of a few days to a few weeks. The main goal is to profit from small market swings. This strategy falls somewhere between day trading and long-term investing.

In swing trading, you buy and sell stocks using market trends. It is ideal for people who want to make quick profits but don’t have time to sit in front of a computer screen all day.

How does swing trading work?

Swing trading targets short-term price fluctuations, both up and down, within a broader market trend. Rather than holding onto a stock for months to make a large profit, swing traders aim to make smaller, more frequent gains that can add up over time. For example, some traders wait months for a 25% gain, but swing traders can make weekly 5% gains, potentially earning more in the long run.

Swing traders use daily charts to figure out the best time to buy or sell, but some prefer shorter timeframes, such as 4-hour or hourly charts, to make faster decisions. This strategy is all about making consistent, small wins that accumulate into returns.

Swing trading works by using technical and fundamental analysis. It involves a few steps:

Predicting the market direction:
Traders use technical charts, such as candlestick charts, line charts, and various indicators.

Timing entry and exit:

Entry: When a stock is at its support level.

Exit: When the stock reaches its resistance level.

Setting a stop-loss:
Traders use stop-losses to limit potential losses.

Holding a position:
The time to hold a stock depends on the market movement and your strategy.

Who can do swing trading?

New investors:
Who want to gain experience in the market.

Busy professionals:
Who don’t have time to trade all day.

Freelancers and students:
Who want to increase their extra income.

Experienced traders:
Who want to profit from small fluctuations in the market.

Advantages and Disadvantages of Swing Trading

Swing traders make decisions based on the risk and reward of a trade. They study the chart of the asset to decide where to set stop-losses and where they can sell for a profit. For example, if a trader risks ₹100 per share with the possibility of making ₹300, it is a good risk/reward ratio. However, risking ₹1000 to make only ₹75 is less attractive. What is Risk/Reward Ratio?

Risk/Reward Ratio is a way of measuring how much risk you take in a trade and how much potential profit you can get in return.

Statement Analysis:

If you risk ₹100 and see a possibility of earning ₹300, then it is a risk/reward ratio of 1:3, which is considered good.

But if you risk ₹100 and see a possibility of earning only ₹75, then it is a risk/reward ratio of 1:0.75, which is not attractive.

Clarity with Example:

Example 1: Good Risk/Reward Ratio (1:3)

Suppose the current price of a stock is ₹500.

Stop-loss: ₹490 (loss tolerance of ₹10 per share).

Target Price: ₹530 (profit objective of ₹30 per share).

In this case:

Risk = ₹10 per share.

Reward = ₹30 per share.

Risk/Reward Ratio = 1:3.

This means that for every ₹1 risked, there is a chance of earning ₹3. This is a good trade.

Example 2: Poor Risk/Reward Ratio (1:0.75)

Suppose the current price of a stock is ₹500.

Stop-loss: ₹490 (loss tolerance of ₹10 per share).

Target Price: ₹507.5 (profit objective of ₹7.5 per share).

In this case:

Risk = ₹10 per share.

Reward = ₹7.5 per share.

Risk/Reward ratio = 1:0.75.
This means that for every ₹1 risked, there is only a chance of earning ₹0.75. This trade is not attractive.

Swing traders mainly use technical analysis, which means looking at charts and patterns as their trades are short term. Sometimes, they also check the fundamentals of the company to ensure the stock has good potential. For example, if a trader sees a stock chart showing potential growth, they can check if the company’s financial health is strong.

Swing traders use daily charts but may also use lower time frames such as one hour or 30 minute charts to find proper entry, stop loss and profit taking points.

Risks and Benefits in Swing Trading

Risks:
Market volatility:
Sudden changes in the market can lead to losses.

Emotional decisions:
The urge to make quick profits can lead to wrong decisions.

Wrong use of stop-loss:
Not setting a stop-loss can lead to increased losses.

Benefits:
High returns in short period of time:
If the strategy is right, it can give better returns than other investment options.

Low capital requirement:
You can start with a small amount.

Personal control:
You have complete control over your decisions.

Indicators for Swing Trading

Moving Average: A moving average smooths out price fluctuations to show the overall trend direction. When prices are above the moving average, it suggests an uptrend while when it is below.

Bollinger Bands: Bollinger Bands is an indicator that shows the high and low points for stock prices based on the average price over a certain time period, such as 20 days. These bands help traders figure out if a stock is overbought or oversold compared to its normal price. When prices hit the top band, it may mean the price is too high and when prices hit the bottom band, they may be too low.

Relative Strength Index: RSI is a momentum indicator used in trading to show if a stock is overbought or oversold. The value ranges from 0 to 100, with overbought under 70 and oversold under 30.

MACD: MACD is a popular technical indicator used in trading to identify trend changes and momentum shifts. MACD uses two lines, a fast and a slow one. It compares two fast moving averages of the stock price over different periods such as 12 days and 26 days. When the fast line crosses the slow one, it could mean that the stock price is moving faster and could rise. When it crosses below, it could mean the opposite.

How is swing trading useful for your future?

Short-term and long-term plans:

You can invest the profit earned from swing trading in long-term investments.

Financial freedom:

It can become a good source of your regular income.

Prospects as a business:

If you do it efficiently, it can also become a full-time career option.

What are the taxes applicable on swing trading and how are they applicable?

The profit or loss in swing trading is taxed by the government. This tax depends on the nature and time period of your trading. In India, swing trading is mainly taxed by Capital Gain Tax and Securities Transaction Tax (STT). Let us understand this in detail:

1. Capital Gain Tax:
   The profit made in swing trading is called “capital gain”. It is of two types:

Short-Term Capital Gain (STCG):
If you have held the stock for less than 12 months and then sold it, it comes under short-term capital gain.

Tax Rate: Short-term gain is taxed at 15% (plus cess and surcharge, if applicable).

Example:

You bought 100 shares at a price of ₹500 per share.

6 months later, sold them at ₹600 per share.

Profit: ₹100 per share × 100 shares = ₹10,000.

STCG tax: ₹10,000 × 15% = ₹1,500.

Long-term capital gain (LTCG):

If you held the stock for 12 months or more and then sold it, it comes under long-term capital gain.

Tax rate: Profit up to ₹1 lakh is tax-free. Above this, profit is taxed at 10%.

Example:

You bought 100 shares at a price of ₹500 per share.

2 years later sold them at ₹800 per share.

Profit: ₹300 per share × 100 shares = ₹30,000.

Profit up to ₹1,00,000 is tax-free, so no tax will be levied on it.

2. Securities Transaction Tax (STT):

STT is applicable on every purchase and sale during swing trading.

STT on purchase: 0.1%.

STT on sale: 0.1%.

Example:

If you bought 100 shares at a price of ₹500 per share:

STT (on purchase): ₹500 × 100 × 0.1% = ₹50.

If you sold these at ₹600 per share:

STT (on sale): ₹600 × 100 × 0.1% = ₹60.

Total STT: ₹50 (purchase) + ₹60 (sale) = ₹110.

3. Goods and Services Tax (GST):

GST is applicable only on brokerage fees, custodian charges and other services.

18% GST is applicable on brokerage fees.

Example:

If brokerage fees is ₹200, then
GST: ₹200 × 18% = ₹36.

4. Other charges:

Stamp duty:
This is a fee levied by the state government, which is applicable on buying shares.

Rate: 0.015%.

Trading platform or exchange fees:

This fee varies across platforms.

Tax calculation in brief:

Capital gains tax (STCG or LTCG): Applicable on your profit.

STT: Applicable on both purchase and sale.

GST: On brokerage fees.

Stamp duty: On purchase.

Example of complete tax calculation:

Suppose:

You bought 100 shares at a price of ₹500 per share.

After 6 months, sold them at ₹600 per share.
Brokerage fee is ₹200.
Profit calculation:
Buying price = ₹500 × 100 = ₹50,000.
Selling price = ₹600 × 100 = ₹60,000.
Profit: ₹60,000 – ₹50,000 = ₹10,000.
Tax calculation:
STCG tax: ₹10,000 × 15% = ₹1,500.
STT (buying): ₹50,000 × 0.1% = ₹50.
STT (selling): ₹60,000 × 0.1% = ₹60.
GST (on brokerage): ₹200 × 18% = ₹36.

Stamp duty: ₹50,000 × 0.015% = ₹7.5.

Total taxes and charges:

= ₹1,500 (STCG) + ₹50 (STT buy) + ₹60 (STT sell) + ₹36 (GST) + ₹7.5 (stamp duty)

= ₹1,653.5.

It is very important to keep taxes and charges in mind while swing trading. It can reduce your profits, so always keep track of your costs (tax + charges) and plan your trading strategy accordingly.

Conclusion:-

Swing trading is an attractive and effective trading technique that offers investors the opportunity to profit from short-term market movements. Although it carries risks, with the right strategy and discipline, it can help you achieve your financial goals. Study the market in-depth, use the necessary tools, and adopt risk management techniques before swing trading. It can not only be profitable for you but can also strengthen your financial future.