Swing Trading
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Swing trading is a style of trading in which investors aim at capturing gains in a stock within the period of a few days to a few weeks. In this trading style, traders take advantage of price swings and ride the direction of the trend by selling if the market is moving downward and buying if the trend is upward.
How Does Swing Trading Work?
Swing trading is adopted by traders who use technical analysis to identify stocks that have a high probability of short-term price momentum. Instead of taking into consideration the fundamental or intrinsic value of a stock, swing traders focus on price trends and patterns.
Swing trading is based on the strategy of entering into a trade just when a strong trending stock has come to the end of a consolidation or correction phase. This is because a strong-trending stock usually appreciates quickly after it has completed a correction phase and this presents an attractive opportunity to generate healthy profits.
The prerequisites for generating healthy profits in Swing Trading are:
- Right stocks: The success of swing trading depends heavily on the selection of stocks. Large-cap and actively-traded stocks,such as Cisco, Apple, Intel and Microsoft, are among the best for this purpose.
- Right market: A swing trader is best positioned when markets are moving sideways. Major stocks and indexes may be roughlyat the same level for a couple of months, while offering the swing trader several opportunities to catch both upward and downward short-term movements.
- Swing trading can prove to be challenging when the stock market is going through a bullish or bearish phase. During such phases, the momentum of the market would drag all the stocks in one common direction. Consequently, the share prices would not exhibit an oscillating pattern, unlike when markets are stable.
Benefits of Swing Trading
Some of the benefits of swing trading are:
- 1. Traders receive sufficient returns that keep them motivated.
- 2. Traders face less distraction and pressure, as they are maintaining their positions for several days.
- 3. It is a good strategy for part-time and new traders.
- 4. Traders pay a lower brokerage fee than that paid by day traders.
