In this article we will talk about a better known trading strategy, swing trading, to obtain short-term profitability.
Swing Trading tries to obtain gains in the movement of an asset within a period of one to several weeks. Traders use technical analysis to find assets with short-term price dynamics. These traders can use the fundamental or intrinsic value of stocks, as well as analyze price trends and patterns.
The trader must act quickly to find situations where the price of an asset has the extraordinary potential to move in such a short time. Therefore, swing trading is mainly used by traders at closing and opening. Large institutions trade in very large sizes to get in and out of stocks quickly. The individual trader can exploit such short-term stock movements without having to compete with the major traders.
Trading involves maintaining a long or short position, at least overnight and for several weeks. The goal is to capture a price movement larger than is possible on the day. Trading involves a wider range of prices and price movement and therefore requires careful sizing of the position to minimize risk to the downside. Swing trading can involve a combination of fundamental and technical analysis. Orders are usually based on longer term charts including 15 minute, 60 minute, daily and weekly charts.
Day Trading vs Swing Trading
The distinction between swing trading and day trading is the time to hold the position. Swing trading involves at least one daily hold, while daily trading closes positions before the market closes. Daily trading positions are segmented for a single day. Swing trading involves holding for several days or weeks. As a swing trader goes through the night, he incurs unpredictable risk during the night, resulting in gaps up or down against the position. When taking risk from one day to the next, swing trades are usually made with a smaller position size compared to intraday, which uses larger position sizes that usually involve leverage through daily trading margin.
A swing trader tends to look for multi-day chart patterns. Some of the most common patterns involve moving average crosses, head and shoulder patterns, flags and triangles, trend channels, key reversing candles such as inverted hammers and hammers, etc. These patterns are widely used, besides other indicators to design a solid trading plan. Stop losses also tend to be larger when trading oscillates to coincide with the proportional profit objective.