Swing trading is an attempt to profit from short-term movements in a stock or other asset, rather than long-term price movements. It is sometimes defined as being a trading strategy in which an investor aims to buy and sell in the space of one to four days. Most swing trading strategies are based on following a set system without deviation. One example would be to to track the moving average, which is the average price of a stock over the previous 10 days, and then buy when the average has risen for three straight days and sell when the average has fallen for three straight days. More sophisticated methods can including using mathematical formulas based on Fibonacci's number sequence, which some traders believe corresponds to the way markets jerk back and forth in reaction to price changes.
The key to most swing trading strategies is identifying the difference between the long-term trends of an asset and short-term market fluctuations. For example, if a company has achieved a dominant position in a growing market and shows signs of good management, the chances are its stock will rise in the long term because the company should be able to make higher profits and pay larger dividends. In the short term, though, the stock may fluctuate. The main cause of this is the market correcting itself; as the price rises, more stockholders want to sell and fewer investors are prepared to buy, driving the price down until a point where the situation is reversed.
Generally, swing trading involves capitalizing on short-term price movements, which are likely to be smaller in scope than the movements caused by long-term trends. Because of this, swing trading strategies often require the investor to either invest more money into a particular stock so a proportional gain makes more cash. Another option is for the investor to widen the range of stocks in which he invests.
Swing trading strategies do not necessarily require stock price rises to make cash. Instead, an investor who thinks a stock price will experience a sudden fall can attempt to make money through shorting. This involves borrowing stock, selling it immediately, and then hoping that the market price drops so the investor can buy the stock at a lower price in time to return to the lender. This technique does bring additional costs, as the lender will usually require a form of interest payment.
Most swing trading strategies are a set of rules or a system that the investor follows to the letter. The idea of this is to help the investor avoid making decisions based on emotion, such as trying to cut losses if things go bad. An investor engaged in short-term swing trading is more at risk of making emotional, and possibly irrational, decisions when the investment is based on short-term movements that are likely to be reversed quickly.