When one mentions the term swing trade, one has to immediately identify the context of the use of the word swing. It could be swapping backyard playground equipment with neighbors, it could refer to the intimate parties of a few of those same neighbors, or it may refer to a particular investing strategy that has been around as long as both of those other practices.
That said, when it comes to the practice of buying and selling stocks, the swing trade is neither for the timid or the uninformed.
Swing Trading, Defined
A swing trade is a term for buying and/or selling stocks at what seems to be the top or bottom of the stock’s current stock peak or valley, as shown on a price graph. In other words, trying to guess where an upward swing will stop, and where a sliding price might stabilize.
In this sense the swing trader uses the same fundamental and – more likely – technical analysis tools and techniques, leveraging as much information, both historical and forward-looking, as possible to make this determination.
Such a strategy is, be definition, a contrarian point of view. In other words, to swing trade you must do the opposite of the crowd.
So Goes the Trend, So goes the Swing
When a stock is rising it means more people are buying than selling, driving the price upward through increased demand. To guess the top of this run, you’ll need to sell (either what you hold or go short) into that trend. Because the moment the majority agrees with you, the stock will have already turned back in the other direction.
To win at swing trading, you need to be a step ahead of the masses, and the market itself. And, you need to have the guts to pull the trigger first.
This is a trading strategy, not an investor’s strategy. Because with long-term investing, trying to time the market is considered a fool’s game. Yet this is precisely was a swing trader does every day, attempting to out-time and out-fox other investors who are looking at the same information.
The Risks of Swing Trading
The risk, of course, is that you are wrong. And if you are, you will immediately be in the red. You may indeed recoup if you hold those stocks long enough for a rebound – never a sure thing – but holding is not part of the swing trading mindset.
Swing trading in a strong bull or bear markets can be difficult because the momentum of the overall market may make historical charting of trading ranges invalid. Pinpointing the peaks and valleys in the near term is much easier in a flat or otherwise undistinguished market environment.
So swing at your own risk. Many swingers, however you define the context of the term, do it for the thrill. In the stock market swing trading is no exception on that count.
