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Swing Trading with CFDs

Swing Trading
Written by Andy

When many people start trading the markets they have the idea of swing trading in mind, whether or not they know it by that name. It is probably the most popular way of trading, as it does not require you to be constantly sitting by your computer, but still provides action and profits within a reasonable time. Usually when trading, it is considered a safer practice to follow the trend since if you don’t you are essentially betting against the market and swing trading aims to take advantage of this coupled with the leverage that CFDs allow to maximise profits.

A swing trader needs to be able to withstand the daily swings stocks will go through. Swing traders tend to use a larger stop loss than day traders, so there will be periods when a trade is going against you, and it’s important to be able to hold your nerve. Swing traders, like day traders, tend to like seeing a profit fairly quickly. Because a position will be open overnight, they need to be able to cope with being away from an open trade. One advantage over day trading is that greater profits per trade are possible as the open position is able to gain more momentum with time.

Swing trading is about avoiding choppy markets, which are not trending, and instead, focusing on the ones that are trending in a specific direction. For a swing trading, trading CFDs is all about digging out stocks which have the potential to move by a sizable amount in a relatively short space of time. Swing trading in essence uses technical analysis to identify the financial securities that are likely to move in price, and provides timing and target values for entering and leaving the trade. The trader is likely to hold the position for a period from days to several weeks. Naturally it is not always possible to pick the top and bottom of every up and down swing in the market and should there be no movement during your original planned trade timeframe, the signals were probably wrong, and it is best to move on to a more active stock.

Using CFDs for swing trading means that you do not need so much money to enter the game, and that you can leverage or gear up your funds to control a much larger holding than you could otherwise afford. While you hold the CFDs and maintain the position, you are charged interest on the borrowing required for that holding, but this is relatively small compared with the amount of profit that you expect to make from the trade.

You should start trading with a definite plan which defines your target price, and also the price at which you realize that the trade has failed and close your position to take your loss. Losses are part of trading, and you must learn to accept them, while still asking yourself whether you should have done anything differently. Sometimes the answer is no, as the market will do what it wants, and not always what you expect.

Swing traders are similar to day traders in that both aim to gain from a CFD trade with a fast turnaround, but swing trading demands greater technical analysis research to seek out the shares with the most generous price momentums on a short-term basis. The swing trader will frequently look for retracements in the price of a trending stock, and wait for the stock to resume its trend before taking a position. This is a relatively low risk strategy, as you are trading with the trend, but looking to enter when the move is still early.

The strength of the underlying trend can be gauged using technical analysis and trendlines – usually chartists will define a trend line using two points to identify and three to confirm. An upward trend can likewise be identified by a series of higher highs and higher lows. So with swing trading, in an upward trend you would plan to execute your entry into the market at a level of support within the trend and exit before the level of resistance is reached. The retracement will be expected to be one-third or one half of the previous move, so at these levels the price would be watched very closely for signs of a resumption in trend. Rarely the price might retrace two-thirds, but if this isn’t met, then the trend has turned and the trade will not be sound. Once you have identified a trend it is just a matter of setting up trades using suitable money management techniques (say risking 1% to 3% of your capital on a trade to set up appropriate risk/reward risk/target levels).

Usually a technical indicator can show if the selling off has been such that the stock is ready to rise again, and several indicators are available to indicate such an oversold condition. You shouldn’t expect every indicator to be in accord before making the trade. Apart from the leverage, the great thing about using CFDs for swing trading is that they are available on all sorts of financial products and indices, and you can use technical analysis on any of them to find the worthwhile trades.

Swing traders typically spend about 2 hours a day researching stocks and executing orders. They need to be able to identify trends. To do so, they keep abreast of the daily news, and use technical analysis to find good entry and exit points. Limit orders with stop and profit targets are set with the trade, so at that point it becomes semi-automated. Of course, there is a certain mental and emotional fortitude in actually sticking with those presets.

Swing traders tend to be more concerned with a stock’s short term price movements rather than its’ fundamental value. And in what is a boon for most people, they don’t need to be toed to the computer all day.

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