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Swing trading relates to a style of trading which uses technical analysis as its basis. Unlike day trading, swing traders are happy to run their positions overnight, and can hold for weeks if that is what their preferred technical indicators are telling them to do. In this way, they hope to capture bigger moves than those expected by day traders and this also means that they are generally prepared to take a larger risk in the hope of capturing a bigger percentage return.
As with day traders, technical analysis is used to time entry and exit points. However, swing traders usually employ a range of indicators (usually chosen after extensive back-testing and trial and error) which can vary depending on the asset class they are trading. This is not to say that some swing traders don’t also use fundamental analysis, especially initially to assess when a stock, index or currency is under or overvalued. But technical indicators are vital – momentum, MACD, moving averages, Bollinger Bands, candlestick patterns and the Relative Strength Index are amongst the most popular indicators used.
Swing Traders tend to have their favourite combinations. The trick is to experiment, but also to understand fully what each indicator is trying to achieve. Also, avoid using any more than two or three indicators per financial instrument or things can become very muddled. Like trend traders, swing traders can run their positions for days or weeks.
However, it’s important to note that swing trades can go against an underlying market trend. For instance, it could be that within a trend a technical indicator suggests that a financial instrument is overbought or oversold. This is where a swing trader steps in to take advantage of a counter-trend move. Quite often these can prove to be very profitable. If a market sells off during an uptrend, it may loosen weaker hands and scare investors out of their positions. This can turn mild profit-taking into a more powerful corrective move.
Position Trading is also known as “buy and hold.” It is a common strategy amongst equity investors who often refer to it as Trend Trading as it can involve similar methods of trend identification before establishing a position. However, in the spread betting and CFD worlds it can refer to a position which is either bought or sold to open. As far as spread betting is concerned, it differs from Trend Trading primarily in that trades are typically held for longer periods of time – often many months.
For both equity traders and spread betters, Position Trading places a greater emphasis on fundamental analysis than would be carried out in Trend Trading. If considering an individual stock this will involve obtaining a good understanding about what the company does, where it operates and the potential for innovation or growth. It will also involve studying the company’s financial statements with particular emphasis on the balance sheet and profit and loss account.
Position traders will want to ensure that the company is financially secure and isn’t loaded up on debt – at least when compared to rivals within the same sector. They will want to ensure that that the company’s stock isn’t overpriced against other stocks in the same sector and also against the wider market in general. Typically, investors will look at the price per share/earnings per share (P/E) ratio to see if the company is fairly valued. The Position Trader will attempt to ensure that a particular company has a good product stream, or offers a unique product with high barriers to entry for competitors. Also, that it is well-run and financially sound. It is only then that the Position Trader looks at charts and technical indicators to establish entry, exit and stop levels for the trade. If any of these don’t add up then the Position Trader will hold off and wait for better trading opportunities elsewhere.
Position Traders tend not to worry about short-term fluctuations and instead try to profit from the longer-term trends. This has the advantage that once the trade is entered it doesn’t require constant monitoring. It sounds easy but Position Trading isn’t for everyone. A Position Trader has to be patient enough to sit back and wait for a trade to play out. They must have the discipline to cope with a position that turns against them (in the short-term) bearing in mind the reasons for entering the trade in the first place.
However, the Position Trader must also be ready to acknowledge when a trade has gone wrong, typically when there is a change in the fundamentals underlying the original decision to take the position. As with all trading, careful risk and money management is vital.
There are four main types of trading strategies: Day, Trend, Swing and Position, and most traders tend to identify and stick to a single approach rather than mixing them up. However, there is also a fair amount of crossover between the four, at least when it comes to using technical indicators or relying on fundamentals. If you are new to trading it is important to look at what is involved in each approach to see how it suits you, your lifestyle and your attitude to risk. After all, you may not have enough free time to day trade. By the same token, you may be uncomfortable taking on the amount of risk which may be required to run longer-term position or trend-based trading strategies.
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