Swing Trading: Profit Booking Riding On Short Term Market Sentiments
Swing trading is a style of stock trading wherein the investors hold a particular stock for small durations, generally not more than a fortnight and buy or sell that stock on the basis of intra-week or intra-month prices. Unlike other investors, swing traders do not concentrate their efforts on company research and are not so concerned about company fundamentals. In short, we can say that a swing trader tries to cash in on short-term movement of the chosen stocks or indices rather than relying on technical analysis.
A popular pick among swing traders is invariably large-cap stocks. Large cap stocks generally belong to Fortune 500 firms. These firms have made money over time, and that’s they have been around for so many years. To a certain extent, it can be said that these stocks tend to move in upward or downward direction based on the market sentiments. Swing traders try to cash in on these market sentiments by riding the wave of optimism/pessimism for a short duration (at most a few weeks) before doing a volte-face.
There are two different ways in which any investor earns a profit upon investing stocks. These are: capital appreciation and dividend income. It should be noted here that anyone interested in swing trading would have already decided that he doesn’t want profits to accrue from dividend income. Investing for such small time durations rules out dividend bonuses in most of the cases.
One sector where traders who are involved in short-term trading are likely to lose money is capital-gains tax. At present, the tax systems favors long term investors. If profits are booked on swing trading stocks, the tax calculated on the capital gains on realization of profits is significantly higher.
Because swing trading provides a quick profit with minimal knowledge of the stock market, it is popular with new investors who want to see results quickly. Because they do not have to perform in depth market analysis to predict future growth, it allows them to make money by following the general direction of the market. Additionally, such investors only hold onto the stock for a short period of growth and thus see much quicker rewards than long term stockholders.
This method of trading stocks is one without any set rules. Every swing trader buys and sells in a different way. Some use statistical tools such as exponential moving averages, but the majority of traders will tell you that swing trading mostly involves intuition for the market.
Swing trading is a type of stock trading that focuses on the short term. Instead of focusing on the long term when trading stocks, swing traders rely on general market fluctuations. Short-term trading like this can be profitable quickly, although investors sacrifice long-term dividends. One disadvantage to this type of trading is that traders owe more capital-gains tax. This style is good for new investors who are not ready to analyze long-term trends. It also offers a quick profit, although not as great as long term trading. Each trader will have his or her own way of trading, usually based on intuition.
- Mark Crisp
