Swing trading is a short-term technical strategy used to trade stocks, indices, and commodities by taking advantage of short trends. Traders identify market gyrations and use a contrarian approach to improve market timing. The strategy primarily relies on technical analysis, including chart patterns and indicators. Traders consider short-term and long-term trends when selecting instruments to trade.
Swing trading is a short-term technical trading strategy commonly used to trade stocks, indices and commodities. It refers to the buying and selling of these tools to take advantage of the short trends that occur in the market. The goal is to profit from the trend of short cycles in market activity, typically spanning two to five days, during which prices will rise and fall within a specific price range or trend. Often certain patterns and indicators will occur and a reversal will occur.
Experienced swing traders have learned to identify these market gyrations. Traders usually sell stocks if the price has moved up and forms a specific pattern that is also supported by predetermined technical indicators, such as trading volume and distance of the price in the daily trading range. Conversely, traders typically buy a stock after the price has fallen and it creates a certain pattern. The intention behind swing trading is to anticipate or predict market reversals and to time trades against the latest patterns and signals. This trading strategy takes advantage of the propensity of prices to fluctuate back and forth in short waves.
Most swing trading strategies use a contrarian approach to trading, which is rooted in the belief that buying and selling decisions made by the general public are typically wrong. As a result, traders can significantly improve their market timing by taking positions opposite the majority. Swing traders tend to buy when others sell and vice versa. Typically, these traders adhere to the well-known “buy low, sell high” market idiom.
Swing trading is primarily a technical trading strategy. Traders can consider fundamentals and other technical tools when choosing the stocks, commodities or indices they would like to trade. Fundamental and technical theories are not infallible; traders need to look at the instruments they are considering trading and get familiar with their short-term and long-term trends. For making buying and selling decisions, trend is the most significant factor to consider when selecting instruments to trade.
A feature of swing trading is that buying and selling, or “set-up” decisions are usually based on chart patterns. Signals at the end of the day or at the opening of trades the next morning are also taken into consideration. Some of the indicators that can be observed closely by traders include the opening and closing prices, the day’s trading range, trading volume and breathing space, or the distance from price high to price low.
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