Swing trading is a type of trading strategy meant to capitalise on market volatility. While positions are typically held longer than a day (normally falling between one and four days), many day traders also engage in this type of strategy. Swing trading, which can be utilised in both short and long positions, involves buying or selling an asset near the top or bottom price of the known volatility. Rather than focusing on the intrinsic value of an asset, swing trading uses technical analysis to determine trends. It is a speculative strategy, and trades are often completed using margin. Margin, of course, can multiply gains and losses and must be used carefully.
A swing trading strategy can be used on any type of asset, including equities, bonds and commodities. Regardless of the type of asset used, it is the market movements that are important. Highly volatile markets, for instance, are extremely well suited to this type of trade as they offer many entry and exit point.
While less common, swing trading can also be successfully used when markets are less volatile. The trader should be especially aware, however, of market trends in this scenario. Also, certain industries will be more suited to swing trading, depending on where they lie in their economic cycle.
Stock market trends, which are often found using chart analysis can be either upward, downward or range bound. In an upward trend, stocks move upward over time, with a positive rate of change. However, this upward movement is intermediated with negative consolidations against the trend. The opposite is true for a downward trend. In longer period of time, upper and lower limits can be determined. Swing trading utilises these intermediate consolidations, and limits as these are the points at which trading should occur. A moving average cross over, for instance is a very strong trading signal. When a short-term average crosses below a long term one, this is a sell signal. A strong buy signal is evident when a short-term trend line crosses above the long-term trend line.
It is important to manage risks when swing trading. This can be done be ensuring the asset is liquid, diversifying your portfolio, monitoring the asset closely, and using stop orders. Limiting your position size based on an absolute ceiling determined by capital willing to lose will also be helpful. If, however, the market and industry are trending there are clear indicators that a trade could be successful.
Swing Trading requires up to date charting and information so these trends can be determined and acted upon. The trading platforms at Accendo Markets are particularly well suited for this type of strategy, as they offer chart analysis and real time data. While swing trading is heavily based on chart analysis, it is important to take fundamentals into account as well to minimise the possibility of nasty surprises.