Swing trading focuses on medium-term investment strategies and attempts to make profits when the stock goes up, and when it comes down – hence the term "swing".
This kind of investment strategy – in terms of longevity of trade – sits somewhere in between day trading and buy-and-hold investing.
Day trading is the most speculative of the investment strategies where a stock is held for less than one day, sometimes for only a few hours or minutes, even seconds. Day traders capitalise on short-term moves in assets – selling at a certain pre-defined level to avoid the risk of counter moves during out-of-hours trade.
Buy-and-hold – or trend investing – is a long-term strategy, where investors follow a particular trend: perhaps a cyclical rally to benefit from rises in stocks most closely allied to a strengthening global economy, or perhaps a "growth" strategy focusing on those stocks that pay the highest dividends.
Inside swing trading
Swing trading is medium-term strategy – usually over a few days, up to about three weeks – where the investor follows surging and fading fortunes of an asset or assets, investing in both the gains and the losses.
"Financial markets never go in one direction forever, and by being able to take advantage of that, you can increase your returns as you in theory are going to be making money when the market rises over the next few days, and then make some when the market pulls back, as it will certainly do sooner or later," says Christopher Lewis of DailyForex.
Being able to spot the turnarounds is important and technical analysis will be able to help here, but the best aid to this type of investment strategy is a market that's going nowhere.
In other words, a rangebound market that has been showing the same trends for several weeks. No shocks such as unexpected interest rate moves, or market intervention by monetary authorities.
In terms of participation, swing trading is also more balanced between the full-time participation rate of day traders and the invest and wait of trend investing, so practitioners can hold a full-time job while engaging in swing trading.
How to swing trade
Everyone wants to identify swing trading strategies that work. If only it were that easy. In hindsight, the stock market correction in January and February provided some good conditions for a swing trading strategy, although volatile markets are more likely to work against swing trading (see "disadvantages" below). A correction is when an asset, index or other price indicator falls more than 10% from its most recent cyclical peak.
Choosing the stocks to follow was not difficult, given the wide agreement that technology stocks were among the most overvalued. During the correction, the S&P 500 technology sector fell 10.4%.
Energy stocks, however, proved the worst-performing sector during the correction as oil prices also went through their own downturn. The S&P 500 energy sector fell 14.6% in the four weeks to 9 February.
Of course, the swing trader would not have been likely to catch all of the downside, but the signals that a correction was under way would soon emerge. It would have been catching the upside after the correction ended that posed the most difficult problem in market timing.