About Short Swing Trading
Swing traders seek to bank profits from spotting short term trends lasting between one and four days. This compromise between day trading and long term investing can be an excellent tool to add to the tools you're already using in your stock trading technique. Short swing trading simply involves spotting downward trends and selling a stock short during that period.
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Significance
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Identify a stock that is a good candidate. Ideally, this will be a stock with some minor volatility over the past two days, but has a strongly defined trend line. The stock should also have demonstrated a similar price pattern over at least the past two four-day periods. In periods of extreme volatility, this will be brutally risky, as in such environments an upward swing on a naked short position could end up costing you a great deal of money. This is partly why swing traders have a marked tendency to exit their positions early: for short swing traders, it's better to be slightly less right many times over than it is to be very correct on many occasions and enormously wrong on others.
The technical analysis skills required for swing trading are a tendentious topic within finance; there is some controversy as to whether it can have consistent returns. Despite this, technical analysis skills give investors the ability to read patterns more effectively.
Function
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Swing traders should become comfortable with trading stocks short to get the most out of the strategy. After all, if you can't profit when a stock is going down, you're cutting yourself out of more than half of your potential profits using the strategy. If you're going to conduct technical analysis on a stock, you should be able to profit from it going down as well as up. Despite this, trading stocks short is riskier than holding them to sell, as you need to borrow the shares to short them legally.
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Features
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Learn how to exit your trades at the right time. Choosing when to enter into a swing trading play is easy--exiting is the hard part, and what separates failures from wild successes. Remember that swing trading is not about massive gains from single trades, but rather building up profits over the long term by the ruthless application of this technical trading method over the long term. It's better to exit a position early with a small profit than to risk having everything evaporate.
Effects
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Enter into short positions on the down trend and exit them in days of higher volatility. If you're making profit, you're safe to get out of your position. If you feel uncertain about a trade, exit it--the whole point of swing trading is to limit your risk over the long term and to get into stable four to five day trading cycles that you understand. If the trade is starting to average a loss, exit the position immediately.
Benefits
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Playing the short side in swing trading can be even more profitable than going long. Many traders have an almost irrational aversion towards shorting stocks, in part because it carries slightly higher risk. So long as you understand it and cover your positions well, make use of it as part of your swing trading strategy.
A strong backing in technical analysis strategies such as Fibonacci sequencing--a method of pattern reading that utilizes the golden ratio--can help enrich your swing trading success, even though swing trading is considered a fundamental strategy overall. Fibonacci sequencing is further split into four common sub-techniques. It uses the golden ratio of 1.618 and applies it to stock charts, most commonly in the form of three percentage numbers--38.2 percent, 50 percent and 61.8 percent--or their multiples.
Another similar technical analysis method is the Eliot Wave, which posits that stock market price movements can be understood as repeating waves similar to those found in nature. Short swing traders can benefit significantly from learning more about technical analysis, as it helps them to anticipate patterns and trends more efficiently. As essentially swing trading is a strategic bet on the idea that market patterns are valid enough of the time to invest upon, knowing more about those common patterns can only benefit the advanced swing trader.
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Resources
- Photo Credit tziralis - Flickr
