Swing trading is a form of short-term trading which seeks to maximize trading profits and minimize risk by entering and exiting strategic trades that are held from 3 to 30 trading days. It is called "swing" trading because it seeks to enter already established trends (for the most part) and ride them as they swing up or down to new highs or lows.
Traits of Swing Trading
Swing Trading takes advantage of brief price swings in strongly trending stocks to ride the momentum in the direction of the trend.
- Swing trading combines the best of two strategies -- the slower pace of investing and the increased potential gains of day trading.
- Swing traders hold stocks for days or weeks playing the general upward or downward trends.
- Swing Trading is not high-speed day trading. Some people call it momentum investing, because you only hold positions that are making major moves.
- By rolling your money over rapidly through short term gains we can quickly build up our equity.
Common Misconceptions of Swing Trading
Swing trading is buy and hold investing.
Buy and hold investing involves the fundamental or economic analysis of market cycles, business sectors and individual companies with the intent of buying solid companies, or funds of such companies, when valuations are attractive or when growth prospects are strong. The aim of this strategy is to realize long-term capital gains with a minimum of portfolio turnover. Buy and hold investors are not traders. They normally pay little attention to even the basics of technical analysis. The holding time of a buy and hold position is usually six months, and in many cases it can be much longer.
Swing trading is position trading.
Position traders are indeed traders inasmuch as they normally rely on the technical analysis of chart trends rather than the fundamental analysis of companies. But their aim is to get in on the beginning of more sizable moves, which may last several weeks to several months. The primary chart of the position trader is the weekly chart, with the daily chart being used to time entries and exits. Position traders like to buy bottoms and sell tops, but if they enter the position too soon, they are forced to sit through sometimes lengthy draw downs.
Swing trading is overnight trading.
The overnight trader is someone who relies on technical analysis skills, along with (sometimes) intraday news breaks, to take a two day position in a stock. The overnight trader normally enters the position in the afternoon of the first day, and sells before the close of the second day. The overnight trader's aim is to capture three phases of movement: the afternoon run, the overnight gap, and the morning continuation. This is a very profitable form of trading for someone with sound trading strategies, but it can be very time-consuming, and trading the exit requires as much focused attention as daytrading.
Swing trading is day trading.
The day trader is someone who, like the overnight trader, relies on technical analysis skills, but uses these to pinpoint only intraday moves in stocks. The day trader's aim is to capture intraday breakout or reversal moves, and to do this repeatedly throughout the day. Day traders never hold positions overnight and losses are usually cut short very quickly. Sometimes a day trader will trade in and out of the same stock, or market derivative (like an index futures contract) over and over again throughout the day.
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