What You Should Know About Swing Trading

The trader moves from one position to another, trying to capture the profits based on the upward and downward swings and then gets out

We have established that trading is not the investor’s game. However, it is important that the investor is aware of some of the trader’s methods. Much like other forms of trading, swing trading is carried out based on one form of technical analysis or the other and the goal is to find short or intermediate term opportunities and leverage them.

Swing trading is a popular form of trading much like Day trading. However, where Day trading positions lasts for less than one day, Swing trading spans a week or two. Think of swing trading as a literal swing. The trader moves from one position to another, trying to capture the profits based on the upward and downward swings and then gets out.

The trader here is interested in making gains from a potential movement in price by capitalizing on buying and selling the interim lows and highs of the market and making an immediate exit.

A key factor here is volatility. An investor pays little or no attention to short term volatility but the trader is bent on taking as much of the small or extreme profits based on the level of volatility of the potential securities.

As with other forms of investing, the first and most important factor is in choosing the right stocks or securities. Choosing a stock whose volatility cannot be exploited due to minimal price movements or extraordinary activities, would pose a limitation.

Beyond the stock itself, the swing trader can only succeed if he can correctly identifying what type of market is currently being experienced and determine how he can successfully exploit it. Depending on their risk levels, some traders focus on highly volatile stocks having a lot of movement and others want simpler stocks.

Rather than trying to target a profit of say 25% for stocks, the profit goal comes down to between 10% and even just 5% in more unfavourable market positions. However, using time and economies of scale, the trader can get even more than a 25% profit by garnering many small wins that would ultimately add up to a big one and yield significant profits.

It is for this reason that many swing traders carry out their analysis on the basis of risk or reward. What is the expected growth trajectory? How much time would it take to peak? What move or countermove can be made? Are there possible losses? What strategies can be used to curb or stop the potential losses?

However, one thing swing trading goes to show is that you need to be very experienced to get away with it or you will lose a lot of money. While it serves as the perfect balance between day trading which lasts a day and trend trading which takes a longer time period like a couple of months, it is not infallible.

Just as the trader is trying to latch on to sudden gains, sudden or abrupt reversals in the market can amount to major losses for the trader. In fact, they don’t even need to be extreme. Trade positions might simply be affected by overnight and weekend market risk where the market the next day or after the weekend is nothing compared to expected projections.

Because of the desire of the swing trader to get short term gains, he might lose sight of the longer term profits which are usually more rewarding. Finally, it also requires the investor to have a lot of capital he is willing to throw around the market.

Based on these factors, it is clear that swing trading at least for the average growth investor, is a rat race. Long term goals stand to offer more controllable and sustainable gains.

Written by Lawretta Egba.