There are many various strategies one can implement in order to effectively trade financial markets, but all require that one have sufficient evidence of just what kind of market is currently being experienced. Whether conditions are bearish, bullish, flat-line, or volatile, there is a strategy for each environment.
One factor that differentiates trading strategies from one another is based on how long certain market trends are expected to persist. For a market with long ups or downs, as exemplified by almost the entire decade from the year 1990 to 1999, trend trading was quite successful. Though hindsight is 20/20, clearly a strategy that is buy long and hold is what works well in conditions where the trend moves in one direction with almost no interruption. Trend trading is such a strategy.
The subject of this article is swing trading, which takes its place somewhere between day trading and trend trading. We already know what trend trading is, and day trading is somewhat self-explanatory. It is a tactic which makes use of tiny movements in market momentum at a high volume, in order to generate returns. Swing trading is not necessarily bound by a definitive position length. While trend trading is defined as trading into large trends for multiple years, and day traders sometimes open and close hundreds of trades within hours or even minutes, a swing trader’s positions can vary in length from weeks to months.
Identify Current Market Trends
One condition that is required for swing trading to be effective is the temperament of the market invested in. Swing trading does not work well in markets with smooth long-term trends that rarely correct themselves up or down. It is ideal for a market that has no outright upwards or downwards motion. These kinds of markets and the assets within them are generally more sensitive to economic or corporate news, and will swing between medium-term historically bound floor and ceiling levels. Accordingly, if your target market is the stock market, picking the right stock is extremely important. Half of profitability comes with identifying the current market trends, and the other half comes with intimate knowledge of your chosen company’s stock.
Often, stocks within a sideways market have predictable patterns for those who take the time to educate themselves on what specific fundamentals or what type of industry or corporate news makes the stocks tick. Stocks with huge market capitalization are good for beginners to start with, and a thorough examination of corporate financial metrics and industry health serve as good indicators. A skilled swing trader is able to appropriate punctual and relevant news about their stock of choice and invest in one direction for the days or weeks that the trend is active, only to switch to the other side of the trade when it reverses.
Swing Trading is a Fantastic Strategy
While fundamentals are reasonably important for an effective swing trader, technical analysis is not, besides one major point. Major channel lines that connect peaks or valleys in a stock, and seek to highlight trends are good to pay attention to. Sometimes these lines can be simply eyeballed, and the trader can exit positions when his or her trade is safely near the trend line. A specific kind of chart called a swing chart is useful for this practice, in that it shows price ranges during each trading day, giving the viewer a reasonable floor and ceiling when connecting the upper or lower ends of the range together over many days. Exact precision is not as necessary as it is for trend traders, and not as insignificant as it is for day traders. Keep in mind that preoccupation with trying to time the perfect exit may lead to increased risk if the market is not exhibiting strong directional trends. Exiting at a safe point and taking profits is a good course to take.
Swing trading is a fantastic strategy for beginner to intermediate traders for several reasons. Many would-be traders already have sufficient knowledge about a stock or trading instrument that they are personally attached to, such as a technology company who makes gadgets they are fond of. Additionally, the time period during which swing trades are historically limited to, a span of days or at maximum, weeks, is short enough to hold the attention and provide timely feedback to those who may not have patience or courage to identify and hold into longer trends. On the other end of the spectrum, the complications that come from day trading and juggling tens of trends at once is often overwhelming, giving swing trading a comfortable middle ground.