Swing Trading-
Swing trading is a special type of investing that occurs over a period of several days and requires that an investor rely on trends in a marketplace to drive his investment decisions. As you might suspect, this type of trading carries a very high risk of loss, since trades are conducted quickly and over a short period of time. However, if you’re willing to accept the risks, swing trading can also be highly lucrative.
How Investors Make Money with Swing Trading:
The term “swing trading” refers to the trader’s strategy of buying or shorting a stock for a few days or weeks only to reverse the speculative action and take the opposite position on the same stock when the investment starts to move in the opposite direction. The ideal candidates for swing trades tend to be large capitalization (“large cap”) stocks, since they are highly liquid and present no liquidity risk for the trader. These types of stocks also oscillate within loosely defined ranges in ideal market conditions, allowing swing traders to profit from small movements in the stock price. Some traders also use commodities or even foreign currency markets as a basis for swing trading working on the same premise that any potential investment should be highly liquid.
Types of Trades
Scalping – Scalping refers to the practice of making dozens or even hundreds of trades per day in an attempt to “scalp” profits from each trade by exploiting the inherent bid-ask spread in the stock’s price. These types of trades require a high level of skill and a very low transaction cost perhaps even having a seat on a stock exchange, since the profit on each transaction is extremely small.
Momentum Trading – Momentum trading is when a speculator looks to find stocks that are moving significantly in one direction. The high volume of the stock signals that the trader can capitalize on the movement. The “momentum” of the stock is what gives the investor his profits, all he has to do is “hop a ride” onto a moving stock and get off of it before it crashes, buying into a rising market and then reversing the strategy and shorting the shares when the price starts to show signs of decline. This is the most typical type of trade associted with swing trading.
Fundamental Trading – Fundamental trading involves detailed analysis of a company. Traders analyze corporate events, profit and loss statements, managerial philosophy, earnings reports, stock splits, reorganizations, and even political events that affect a company. This type of trading looks for undervalued stocks and holds them for a long period and thus does not lend itself well to swing trading.
News Trading – Trades are based on news events that influence the price of the stock. Anticipation of market reaction and maintaining a close watch on the timing of scheduled news events such as the release of annual figures or significant product news is the key to success when using this particular strategy. Often this type of trading is associated with the market truism “Buy the Rumor Sell the News”. In other words, once the news is actually released the opportunity is almost gone. The price will often peak (or bottom depending on the news) within a few hours (1 -2 days maximum) of the release of the news. For instance if a drug company is expecting approval of a new drug the price of the stock will build until the day of release of the good news. Then the outsiders begin to buy the price peaks within a few days and then falls back to a more sustainable level and over the next couple of years as the drug is developed and becomes profitable the stock will slowly climb to the peak previously obtained. Swing traders would buy prior to the news release and then sell the day after the release and perhaps even go short at that point.
Technical Trading – Technical traders are obsessed with charts and graphs. Data mining drives the technical trader since he looks for patterns in the market. Trades are based on spotting a trend or pattern, and then successfully investing based on the trends that develop in the marketplace. What a technical trader is essentially looking to do is spot trends using the technical analysis they have performed and profit from any potential correction to the current price.
The Best Market For A Swing Trader
Strong Bull and bear markets are not a swing trader’s friend. These market extremes make it challenging for swing traders to make money based on small movements in the marketplace. Since strong bull or bear markets move stocks in one general direction, but do have smaller cycles inside the longer trend a swing trader might only participate in half the trades. In other words, in a bull market a swing trader might buy when the market pulls back and only ride the uphill side of each small cycle and then sell at the peak and wait for the next pull back. In bear markets the swing trader might only trade the down sides. Thus, swing traders prefer a “flat” market where small fluctuations give and take gains away. This way, traders can go long and then short stocks to make profits without worrying about the larger stock trend.
Risks
The risks inherent in swing trading should be apparent. Market timing makes a swing trader profitable. However, market timing is notoriously difficult to do. If a swing trader cannot accurately time the market, he can’t profit from it. What’s worse, some swing traders employ the use of margin accounts. A margin account allows a trader to borrow money to invest. In other words, the trader can control a sum of money that is larger than what he actually has to invest. This magnifies his gains, which is appealing to traders. However, it also magnifies his losses and could cause him to lose more than he has personally invested. If you think you can manage these risks by setting firm trading rules in place, establishing firm entry and stop loss positions, and make non-emotional investment decisions, swing trading might just provide enough volatility to boost your total portfolio return.
Recommended Books:
A Beginner’s Guide to Short Term Trading: Maximize Your Profits in 3 Days to 3 Weeks
See Also:
Trade Considerations for Option Expiration Week
Basic Elliott Video Lesson — How the Zigzag Measures Up
Author Bio:
Christine Sullins and Charles Ronson collaborated and contributed this guest post for Easy Finance. Christine is a freelance writer. Charles has extensive experience as a trader. Their articles mainly appear on trading blogs.
Photo Credits: by TheChinaMan | Swing
