In this article, you will learn what swing trading means, and how it compares to other investing methodologies available to the investor.
One basic thing to understand before knowing about investing technique is to know that one size don’t fit all. Every investor should think which technique would fit his investment horizon and then decide.
Investing technique can be broadly divided into three time horizon based on how long the investor hold his stocks.
Traditional “Buy and Hold” Investing(Long term investor)
- Holding period of several years to decades
- Balanced portfolio of 20 or more stocks should be created to take advantage of divercification.
- Based on fundamental analysis
* Very passive, minimal work required * Capital gain tax is lower than short term tax
* Limited liquidity and the investment is tried for long time.
* Potentially large drawdowns and long periods of time with no appreciation
* Dependent on market to always move higher, with no consideration of trend
Position Trading (also known as “trend trading” and Medium term trading)
- Holding period of 6 months to several years
- Few stock are purchased.
* Designed to achieve big gains from riding strong and steady market trends * Very passive, minimal work required * Provide liquidity in case you need it.
* Large drawdowns in choppy or indecisive markets
* Volatility in profit and loss (P&L)
Swing Trading (Momentum trading)
- Holding period
- Near-term trades are several days to weeks or also intradays.
- Intermediate-term trades are 3 to 6 months
- Flexible, well-balanced strategy with solid reward-risk characteristics
- Mostly based on technical indicators
* Strong risk control due to market timing
* Flexible enough to take advantage of shorter-term technical trends in both directions
* Based on technical analysis, which works because stock picking is based on current price and volume trends
* Active management requires more monitoring and solid stock market timing
- Holding period of several minutes to one full day
- Takes advantage of intra day price and volume momentum in the markets
* Extremely risk-averse due to no overnight exposure and risk of outside events
* Like swing trading, is a technical-based trading methodology
* Requires very active management, sitting in front of monitor all day
* Physically and mentally demanding (requires solid reflexes)
* Quite time consuming, only suitable for full-time traders
Now that you are aware of the major trading technique, pick your favorite trading technique and learn as much as possible about it before start trading in any of the technique. If used correctly, you should be able to appreciate your investment using stock trading.