Technically speaking, holding a stock for longer than a single day is a swing trade. Swing trading sits in the middle of the continuum between day trading to trend trading. A day trader will hold a stock anywhere from a few seconds, to a few hours, but never more than a day.
A trend trader examines the long-term fundamental trends of a stock and may hold the stock for a few weeks or months. Swing Traders take advantage of momentum, attempting to capture gains in a stock within a short time frame ranging from one to several days. Swing traders use technical analysis to look for stocks with short term price momentum. These types of traders are not generally interested in the fundamental or intrinsic value of stocks, but rather the price trend or pattern. Swing trading is more suitable for individual traders, as large institutions tend to trade in sizes that are too big to move in and out of stocks quickly. The individual trader is able to exploit short term stock movement without having to compete with the major traders. Swing traders look for situations in which a stock has the potential to move in a short time frame and they must act quickly.
WHAT MAKES A SUCCESSFUL SWING TRADER?
Firstly they must pick the right stocks! Large cap stocks that are actively traded on major exchanges. In an active market they will swing broadly between defined Support and Resistance and the swing trader will ride the wave in one direction and/or the other.
Secondly they study the market environment – the market extreme’s, such as a raging bull or a bear market, where the momentum will general carry stocks for a long period of time in one direction, confirming the strategy. The market in between these two extremes poses a different challenge, interestingly the swing trader is best positioned when the markets are going nowhere – they can ride the wave up for a couple of days and then back down. If this pattern is repeating again and again, a couple of months may pass with major stocks and indexes roughly the same as their original levels, but the swing trader has had many opportunities to catch the short-term movements up and down!
Identifying when to enter and when to exit a trade is another challenge, in a perfect world swing traders would trade from support to resistance but as we know trading is not an exact science. Swing traders rely very strongly on technical analysis, go long when their specific indicators line up and sell when their specific indicators tell them to do so and vice versa. There is no right or wrong way. The important thing is to choose your indicators and stick to them. Discipline is key in removing the emotion from the trade. Swing trading is a really good trading style for the novice trader and yet still offers excellent profit potential for intermediate and advanced traders.
Swing Trading is like Surfing! The market is an Ocean of change, constantly moving, changing and uncertain. The waves are created far from the shore, we wait, patiently on our boards for the right one. Then we ride the momentum for as long as we can but generally not until we are thrown back up on the beach!