Swing Trading

Written by Jacey Harmon
Bookmark and Share

Swing trading involves trading a stock, index funds, or options contracts, profiting on short term moves in the market. There are some advantages and disadvantages to swing trading. Swing traders must have an understanding of technical analysis and be willing to take on a certain amount of risk.

A swing trader will identify a change in price direction in either a stock or the general market. The trader intends to profit from the sudden change in direction, capitalizing on the expected move. For instance, a stock may be in a sustained downtrend and a swing trader will identify a possible bottom and change in price direction.

Swing trading is not a buy and hold strategy for investing in the market. Instead a swing trader will try to profit anywhere between five to 20 percent in a matter of a few days to weeks. Since swing trading is a short term trading plan, fundamental analysis is not as necessary as with other investing plans. Fundamental analysis is the study of a business's earnings and revenue potential and other factors pertaining to financials.

You Must Understand Technical Analysis for Swing Trading

Technical analysis is the study of the relationship between price and volume in either the general market or an individual stock. The price is simple--it is what the stock is selling for on the market. Volume is the number of shares traded on a day or in a week. A simple stock chart will show both price and volume for an index or stock. By understanding the relationship between price and volume you can have a better idea of the direction in which a stock is likely to go. When you understand the direction in which a stock is likely to go you can profit from the expected move.

For instance a stock that is going down continuously on heavy volume and rebounding on light trade is likely to keep falling. A swing trader will see this type of action and sell the stock as it rebounds on light trade only to buy it back at a lower price. The market exposes its intentions through the relationship between price and volume. Swing traders understand how that relationship works and profit from it.

Some of the drawbacks to swing trading are the time it takes for learning technical analysis, research and tax and commission repercussions. There are several services available that can help an individual reduce the amount it takes for research. These services can help with learning, or there are other resources such as books and investing groups. Short term trading tends to have higher commission costs whether you win or lose. Capital gains taxes are higher for short term trades than for long term trades and reporting an abundance of trades at tax time can be head splitting.

Bookmark and Share