Many Indian retail traders are actually swing traders even if they don't know it. They aren't comfortable with strict single session day-trading positions. Nor are they looking for long-term buy and hold strategies. They are seeking short-term profits, taking exposure for two-three days at a time or maybe a week at the most.
Like any other form of margin-based trading, swing trading involves setting tight stop-losses and playing through a set of scenarios mentally when taking a position. The trader has to have some reason to believe the price of the target contract would move in a given direction before he takes a position. The reason could be purely technical or news-based.
Before taking the position, he works out the stop-loss. Unlike a day-trader, swing traders rarely use programmed stop-losses. Most hold a mental loss limit/stop. Experienced traders know a mental stop-loss limit would often be exceeded in adverse situations because stocks can open with gaps. If the stop-loss is hit or exceeded, the trader must exit. In this sense, the time frame itself makes swing trading inherently riskier than day trading where, by and large, traders can get out pretty close to the stop-loss.
Most swing trading can be carried out according to mechanical principles. Many successful swing traders look to identify a major trend —meaning a trend they believe is sustainable over several days. Some traders will use a set of three moving averages (MA) — say a combination of three-day, five-day and 15-day MA sets and only trade when the three averages are all signalling in the same direction.
Others will trade purely on a price breakout or breakdown. That is, they wait for a price, which is a 20-day high or low, for instance. In both cases, experienced swing traders wait for a minor correction. That is, if there's a breakout, the trader will buy on the first dip. If there's a breakdown, the trader will sell on the first rally.
Some traders will go with what is known as a failure test as entry signal. This is usually when the target contract is range-trading and either support or resistance is unsuccessfully tested. For example, there is a breakout above a resistance and the breakout immediately fails and the price falls back below the resistance. Or, there is a breakdown below the support followed by an immediate recovery to above support. In these cases, the failure test is taken to be an entry signal with the assumption the range-trading pattern will continue.
From a swing trader's perspective, the Nifty is at an interesting point. It could be ready to breakout above resistance at 6,225-6,250. Or it could be set to drop till it hits support at between 5,975 and 6,000. If there's a failure test, an inability to breakout, the trader should be ready to look for a short. If there's a breakout, the trader should be prepared to go long on the next correction. The situation could resolve into a signal in the next few sessions.
The author is a technical and equity analyst
