Trend Versus Swing Trading
Trend traders in the stock market are position traders and long-term traders who follow a trend which may last several months or even years. Their goal is to capture a large part of this directional movement. Swing traders work to capture short-term moves within the long-term trend, entering and exiting several times to maximize profits.
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Time Frame
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Price movement in a strong uptrend tends to move upward for several days and then retrace a certain percentage before moving upward again. Swing traders work with those smaller price movements, while trend traders do their best to ignore these whipsaw effects unless the stock price indicates that a long-term reversal is taking place.
Effects
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Trend trading is less work than swing trading, and less risky because the longer-term traders do not get whipsawed out the way swing traders do when the price does not move as expected. However, a good swing trader can cull more profit from a long-term trend than someone else can by simply riding the trend to the end.
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Function
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Swing traders do not pay attention to corporate fundamentals such as earnings; they only watch the chart for technical indicators and price. Trend traders might research fundamentals to improve their strategy, but the most important indicator in trend following is price. A trend trader periodically establishes what price the stock will have to drop to before he or she exits, because that price will signal a change in trend.
Features
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Trend traders enter the market after the direction is definitively established, missing the first part of the move. They exit after the market has obviously reversed, so they leave a fair bit of profit on the table. Swing traders work to obtain a maximum amount of profit by buying as close to a short-term reversal as possible, and exiting as close to the beginning of the pullback as they can pinpoint.
Benefits
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An example of a trend trade could be the case of John Deere from 2006 through 2008 (see the Resources section below for a link to the chart for DE). The stock began a definitive upward trend in late 2006, and a trend trader would probably buy at around $48 in December 2007. From there this trader would watch for a signal that the trend had reversed, and would probably exit in July 2008 at $69 because the price had broken through a support line at the $70 mark. The support line in this case is a low price over the past several months which the stock kept "bouncing" off of and then finally broke through. At 100 shares, this trend trader would make $2,100 in about seven months.
Potential
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The swing trader's strategy is much more active. He must work with larger amounts of shares to equal what the trend trader accomplishes and be very skilled at calling short-term reversals. Swing traders identify the best spot for entry on a pullback and the best spot for exiting on an upswing. An effective swing trader might make five or six trades during this particular time frame, because it is a rather stodgy stock with little volatility. Trading 500 shares, the swing trader might have two losses of 1 point each or $1,000, but be successful for 2-point gains on two trades and 3-point gains on two more trades, for a gain of $5,000, with a total profit of $4,000, minus commissions.
Considerations
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Swing trading can be very profitable, but is much more work and must be treated at least as a part-time job. Swing trading also requires a great deal of practice and skill to be more successful than trend trading.
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