What is Swing Trading?

Posted: 28 Jan 2008 | Categories: Stocks Mutual Funds

When it comes to the subject of swing trading, there are as many approaches as there are swing traders. So let us first define our terms.

If we agree that the term ‘investing’ basically refers to the old-fashioned ‘buy and hold’ strategy then ‘trading’ implies the use of management techniques to monitor positions whether they be long term or short term in length.

Trading is simply exchanging one position for another, such as ‘cash’ for ’stock’ or ’stock’ for ‘cash’. Depending on the trader’s market outlook, the stock positions can be either ‘long’ or ’short’.

An argument can be made that ‘trading’ is nothing more than the art of locating two groups of ill-informed market participants; those willing to sell to you at a price too low, and those willing to buy from you at a price too high. Therefore, it could be argued that ‘trading’ attempts to benefit from taking advantage of ignorance.

The problem is that each side thinks they are right and the other side is wrong. The reality, of course, is that they both cannot be right. Difference of opinion, after all, is what makes a market. And in the process, traders render a valuable service to the world at large by creating what economists refer to as ‘price discovery’.

Swing trading is a subset of the broader category of trading. It is a style of trading that can be adapted to any time frame. The main characteristic being ‘buy on declines, sell on rallies’.

The most ambitious proponents engage in what, in technical jargon, is called ’stop and reverse’ (SAR) tactics. These traders are always in the market, either long or short, regardless of trend. They are never in cash.

Others attempt to trade only with the trend on their side. They like to have the wind at their back. Trading with the trend usually results in fewer, but more profitable trades.

The problem with day trading, besides the necessity of being glued to a monitor all day, is that the small profits require a very large capital to make it worthwhile. That pretty much rules out most individual ‘retail’ customers.

However, there is a fascinating, largely overlooked, exploitable niche available to the vast majority of individual traders involving holding a position anywhere from two to five trading days. Frequently, a swing trade can last as long as ten days, but typically it’s about a two to five day trade.

Think about this. The two to five day time frame is too long for day traders who rarely hold a position overnight, and at the same time, it’s too short for the very large institutions to take advantage of. What this means to you is that two of the most dominant market groups in existence today are not really involved in this ‘window of opportunity’.

Although the ‘big elephants’, the institutions, can move fast if need be, they usually don’t like disturbing the markets if it can be avoided. Their very large transactions, which are usually done over a longer period of time, would simply take too much of a beating. It would cost them too much money. On the other hand, day traders, market makers, and specialists do not typically hold positions overnight. Therefore, the astute individual swing trader operating in this void is devoid of serious competition. Basically, they are operating in a ‘zone’ that is populated by ill-informed market players. Does it get any better than this?

While it is beyond the scope of this article to completely describe the techniques of swing trading, a few of the important factors can be hinted at.

Swing trading involves timing and trading against the emotions of fear, greed, and uncertainty. Become a master at pinpointing when one emotion turns into another and you’ve got the game conquered.

When the dominant players, the ‘bulls’ and ‘bears’ are uncertain, stocks tend to consolidate. Go nowhere. Vacillating within a trading range. When fear is the dominant emotion shared by the dominant group in the stock, the stock will trend lower. When the dominant emotion is greed, the stock will trend higher.

Dominant groups tend to run out of steam within three to five days. They run out of ammunition. There’s only so many bullets in their guns. They have to reload. Then the other group becomes dominant and the market swings in the opposite direction. Note: If one side moves the market more than five days in one direction, there’s no telling how far it can go. It could be a route. Either go with it or stay out of the way!

What the swing trader generally looks for is referred to as a ’setup’. First, identify a market that is trending. If the trend is rising, your job is to buy at the first sign the decline is over and sell at the first sign that the rally has come to an end. If the trend is declining, your job is to short at the first sign that the rally is over and cover at the first sign that the decline has come to an end.

Why is swing trading the two to five day cycle better than traditional day trading? Simply because the individual has more time to process and filter information. Which in turn allows for decisions that are more intelligent. In a word, it’s more relaxed.

Because No One Cares More About Your Money Than You

http://dynamic-stock-market-strategies.com

Good trading, Don Heggen

Article Author :Don_Heggen