Swing trading is a speculative
trading strategy in financial markets where a tradable asset is held for one or more days in an effort to profit from price changes or 'swings'. A swing trading position is typically held longer than a
day trading
Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks ...
position, but shorter than
buy and hold Buy and hold, also called position trading, is an investment strategy whereby an investor buys financial assets or non-financial assets such as real estate, to hold them long term, with the goal of realizing price appreciation, despite volatility.
...
investment strategies that can be held for months or years. Profits can be sought by either buying an asset or
short selling. Momentum signals (e.g., 52-week high/low) have been shown to be used by financial analysts in their buy and sell recommendations that can be applied in swing trading.
Swing trading methods
Using a set of mathematically-based objective rules for buying and selling is a common method for swing traders to eliminate the subjectivity, emotional aspects, and labor-intensive analysis of swing trading. The trading rules can be used to create a
trading algorithm
Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of ...
or "trading system" using
technical analysis or
fundamental analysis to give buy-and-sell signals.
Simpler rule-based trading approaches include Alexander Elder's strategy, which measures the behavior of an instrument's price trend using three different
moving averages of closing prices. The instrument is only traded Long when the three averages are aligned in an upward direction, and only traded Short when the three averages are moving downward. Trading algorithms/systems may lose their profit potential when they obtain enough of a mass following to curtail their effectiveness: "Now it's an arms race. Everyone is building more sophisticated algorithms, and the more competition exists, the smaller the profits," observes Andrew Lo, the Director of the Laboratory For Financial Engineering, for the
Massachusetts Institute of Technology.
['']International Herald Tribune
The ''International Herald Tribune'' (''IHT'') was a daily English-language newspaper published in Paris, France for international English-speaking readers. It had the aim of becoming "the world's first global newspaper" and could fairly be sai ...
'', November 23, 2006. https://www.nytimes.com/2006/11/23/business/worldbusiness/23iht-trading.3647885.html
Identifying when to enter and when to exit a trade is the primary challenge for all swing trading strategies. However, swing traders do not need perfect timing—to buy at the very bottom and sell at the very top of price oscillations—to make a profit. Small consistent earnings that involve strict
money management rules can compound returns over time.
It is generally understood that mathematical models and algorithms do not work for every instrument or market situation.
Risks involved
Risks in swing trading are commensurate with market
speculation
In finance, speculation is the purchase of an asset (a commodity, goods, or real estate) with the hope that it will become more valuable shortly. (It can also refer to short sales in which the speculator hopes for a decline in value.)
Many ...
in general. Risk of loss in swing trading typically increases in a trading range, or sideways price movement, as compared to a
bull market
A market trend is a perceived tendency of financial markets to move in a particular direction over time. Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time-fram ...
or
bear market
A market trend is a perceived tendency of financial markets to move in a particular direction over time. Analysts classify these trends as ''secular'' for long time-frames, ''primary'' for medium time-frames, and ''secondary'' for short time-fram ...
that is clearly moving in a specific direction.
See also
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Algorithmic trading
Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of ...
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Day trading
Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks ...
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Don't fight the tape
Trend following or trend trading is a trading strategy according to which one should buy an asset when its price trend goes up, and sell when its trend goes down, expecting price movements to continue.
There are a number of different techniques ...
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Dow theory
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Trend following
References
Further reading
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{{stock market
Share trading
Technical analysis
Financial markets