We take a basic look at what Swing Trading is and how to use it in trading.
Trading Categories
In our opinion, there are three broad categories that can be used to classify all trading methods. These categories are based around the amount of time a speculator holds his or her position in the market. These classifications are described below:
Short-term - Traders hold positions from a matter of seconds to several hours but rarely longer than 1 day. Examples: Day Traders: Scalping, momentum breakouts.
Medium-term - Once a position is held for longer than one day it can be classified as a medium term or swing trade. Traders hold positions from several days to weeks. Examples: Technical and fundamental swing traders.
Long-term - Traders hold on to positions for weeks, months and even years. Examples: Position trading, investing.
There is no rule to say that you must constrict yourself to only one classification. It will probably be the case that you will try your hand at all three before you find what suits you the best. You may find that you can only create an acceptable level of diversification by using methods from all three at once! Likewise there is no rule that says technical traders must be short or medium term traders, or fundamentals have no place in a day trader's tool box.
What is Swing Trading?
Swing trading is essentially a medium term trading strategy. Trades will last from a few days to several weeks. These trades are most commonly based on technical analysis carried out on daily timeframe charts but swing traders can switch to shorter-term charts to pinpoint entries. The object is to trade in and out of the market to take advantage of the medium term price swings that occur in any long-term trend.
What is a Swing?
By definition a swing is a short-term price fluctuation. These fluctuations form a swing high and a swing low and tend to look like mini trends within a longer-term trend. Price swings occur on all time frames. If you think about it, price never goes straight up, or down, without some fluctuations.
The Objective of a Swing Trader
The goal of a swing trader is to capture a portion of the price swings that occur in a long-term trend. They believe that this gives them the advantage over position traders. This is because a share may gain $10 in value over the course of a year but the swings in price may be amount to $20 or $30. There is a mistaken belief that swing traders can only make money in a sideways moving market, therefore missing out on strong trends. This is not the case as a good swing trading method will identify the beginning of a new swing, and if this swing develops into a longer term trend there is no reason for the trader to exit his or her position. These substantial swing trades are rare but swing traders make sure they capture them if the market makes them available.
Advantages of Swing Trading
It is possible to identify, and trade, price swing on all time frames. However, the most common understanding of a swing trader is one who uses daily charts to identify trade opportunities. Because of this many swing traders pay little or no attention to daily price action. Analysis can be conducted at the market close every day and it is possible to place your orders in the form of stop and limit entries before market open the next day. This is exceptionally advantageous for those who are ruled out of day trading due to a full-time job or for those who simply choose not to spend their day in front of a PC. Although less active than a day trading in terms of frequency of trades swing trading is vastly more active than full-blown investing. An investor may make a handful of trades a year at most whereas a swing trader may identify several trade opportunities a month depending on how many stocks, indices or currencies he or she chooses to follow. Developing a swing trading strategy and identifying trade possibilities gives you the opportunity to take responsibility for your own portfolio rather than leaving it to a financial advisor or broker. This is ideal if you don't have the time or inclination to day trade but you want to avoid handing the responsibility over your risk capital to someone else.
Swing Trading Restrictions
There is no limit to the number of swing trades you can make as long as you have a positive profitability ratio and enough margin available in your account to cover your open positions. However, the fact that swing traders are allowed to participate in intermediate price swings is because the size of their orders does not have a significant influence on the market price of the security. This rules out large institutions, hedge funds and mutual funds from effectively swing trading individual stocks because their order size may move the market.
Summary
Swing trading may not be for everyone. Many traders take time to adapt to certain methods and try several before deciding on something that suits them, and their account. Swing trading is immensely popular with those speculators who find the white knuckle ride of day trading too intense but enjoy managing their positions on an end of day basis. Although most swing methods tend to be heavily technical analysis based it still pays to make oneself aware of important data releases such as earnings reports. These reports have the potential to create gaps in the chart that may be larger than your risk tolerance. Although you may be mesmerised by the swings in our examples you must be aware that it is very rare for any swing method to capture a swing right at the optimum entry point. Swing traders aim to collect a portion of the swing by identifying criteria that put the odds of success in their favour. Trading with stops and defining risk is vital.
Trading Categories
In our opinion, there are three broad categories that can be used to classify all trading methods. These categories are based around the amount of time a speculator holds his or her position in the market. These classifications are described below:
Short-term - Traders hold positions from a matter of seconds to several hours but rarely longer than 1 day. Examples: Day Traders: Scalping, momentum breakouts.
Medium-term - Once a position is held for longer than one day it can be classified as a medium term or swing trade. Traders hold positions from several days to weeks. Examples: Technical and fundamental swing traders.
Long-term - Traders hold on to positions for weeks, months and even years. Examples: Position trading, investing.
There is no rule to say that you must constrict yourself to only one classification. It will probably be the case that you will try your hand at all three before you find what suits you the best. You may find that you can only create an acceptable level of diversification by using methods from all three at once! Likewise there is no rule that says technical traders must be short or medium term traders, or fundamentals have no place in a day trader's tool box.
What is Swing Trading?
Swing trading is essentially a medium term trading strategy. Trades will last from a few days to several weeks. These trades are most commonly based on technical analysis carried out on daily timeframe charts but swing traders can switch to shorter-term charts to pinpoint entries. The object is to trade in and out of the market to take advantage of the medium term price swings that occur in any long-term trend.
What is a Swing?
By definition a swing is a short-term price fluctuation. These fluctuations form a swing high and a swing low and tend to look like mini trends within a longer-term trend. Price swings occur on all time frames. If you think about it, price never goes straight up, or down, without some fluctuations.
The Objective of a Swing Trader
The goal of a swing trader is to capture a portion of the price swings that occur in a long-term trend. They believe that this gives them the advantage over position traders. This is because a share may gain $10 in value over the course of a year but the swings in price may be amount to $20 or $30. There is a mistaken belief that swing traders can only make money in a sideways moving market, therefore missing out on strong trends. This is not the case as a good swing trading method will identify the beginning of a new swing, and if this swing develops into a longer term trend there is no reason for the trader to exit his or her position. These substantial swing trades are rare but swing traders make sure they capture them if the market makes them available.
Advantages of Swing Trading
It is possible to identify, and trade, price swing on all time frames. However, the most common understanding of a swing trader is one who uses daily charts to identify trade opportunities. Because of this many swing traders pay little or no attention to daily price action. Analysis can be conducted at the market close every day and it is possible to place your orders in the form of stop and limit entries before market open the next day. This is exceptionally advantageous for those who are ruled out of day trading due to a full-time job or for those who simply choose not to spend their day in front of a PC. Although less active than a day trading in terms of frequency of trades swing trading is vastly more active than full-blown investing. An investor may make a handful of trades a year at most whereas a swing trader may identify several trade opportunities a month depending on how many stocks, indices or currencies he or she chooses to follow. Developing a swing trading strategy and identifying trade possibilities gives you the opportunity to take responsibility for your own portfolio rather than leaving it to a financial advisor or broker. This is ideal if you don't have the time or inclination to day trade but you want to avoid handing the responsibility over your risk capital to someone else.
Swing Trading Restrictions
There is no limit to the number of swing trades you can make as long as you have a positive profitability ratio and enough margin available in your account to cover your open positions. However, the fact that swing traders are allowed to participate in intermediate price swings is because the size of their orders does not have a significant influence on the market price of the security. This rules out large institutions, hedge funds and mutual funds from effectively swing trading individual stocks because their order size may move the market.
Summary
Swing trading may not be for everyone. Many traders take time to adapt to certain methods and try several before deciding on something that suits them, and their account. Swing trading is immensely popular with those speculators who find the white knuckle ride of day trading too intense but enjoy managing their positions on an end of day basis. Although most swing methods tend to be heavily technical analysis based it still pays to make oneself aware of important data releases such as earnings reports. These reports have the potential to create gaps in the chart that may be larger than your risk tolerance. Although you may be mesmerised by the swings in our examples you must be aware that it is very rare for any swing method to capture a swing right at the optimum entry point. Swing traders aim to collect a portion of the swing by identifying criteria that put the odds of success in their favour. Trading with stops and defining risk is vital.
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