What is Swing Trading?

Published by Thomas Herold in Investments, Trading

'Swing Trading' is explained in detail and with examples in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

Swing trading refers to a wide range of shorter time frame trading strategies used in the stock market. Once a purview of only wealthy or professional full time traders this form of trading has become far more broad-based and accessible to regular investors. This is thanks to the vast proliferation over the past few years of the Internet revolution, an explosion in information and charting capabilities, and a range of affordable, efficient and fast online trading platforms.

Those who practice swing trading try to realize gains in a financial instrument such as stocks by holding them for from only overnight to even several weeks. The majority of swing traders will employ a technical analysis to consider various stocks that might offer shorter term momentum in price. It is possible that such traders will also use intrinsic fundamental analysis of the stocks alongside their analysis of patterns and trends in the price.

Because swing trading requires speed and availability to execute these types of trades, the majority of those traders or investors who utilize it are day traders or those who work from home. The institutional traders work with enormous sizes which prohibit them from quietly entering and exiting stock trades. It is the individual lone-wolf trader who can take advantage of these shorter-term movements in the prices of stocks. They have the advantage of not having to go head to head against the large investors of the trading business.

The ultimate hope for swing trading (which differentiates it from pure day trading) is that the trader will be able to realize a more substantial move in the price than the intraday trader can manage. This is because the swing trader takes for granted bigger ranges in the price and movement. With this in mind the traders who practice it must use careful cash management and stop loss orders in an effort to reduce their loss potential. Swing traders are utilizing charts with longer time frames ranging from 15 minutes through hourly to even daily and weekly charts.

Many swing traders confine their efforts to an ETF exchange traded fund or a particular stock when they engage in these relatively shorter-timeframe trading periods. It is rare for them to hold on to their stocks for more than three to four weeks. It separates these traders from the buy and hold or longer-term timeframe investors. Such investors could conceivably maintain a given investment for several years and into decades when the company is performing well.

Swing traders are not all using the identical trading strategies either. A great number of them will employ mean-reversion techniques. This is simply a complicated way of saying that they wish to purchase their stocks at lower prices and hope for a move in the direction to sell them later at higher prices. There are also traders who seek out momentum play stocks which are already moving ahead sharply. They ascribe to the concept that a winning stock will continue to act like a winning stock. This is the reason that they buy at high price points hoping to sell the stocks for even greater price levels.

Other swing trading strategies revolve around earnings release plays. They might place a short term trading bet that they company will outperform Wall Street’s expectations. They could similarly sell the ones that they believe will under-perform the consensus view with their earnings.

Some swing traders employ still more sophisticated and complex strategies using macroeconomic concepts as part of their formulating ideas. They may hold that a given economic data release will come out higher or lower than the general consensus forecast. They could make a market position in an effort to benefit from such a result. When they do this, traders must be correct not only regarding the economic data release, but also concerning the impacts such news will have on their chosen asset in question.

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The term 'Swing Trading' is included in the Investments edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.