WHAT IS SWING TRADING?
Swing trading is an option trading strategy designed to take
advantage of an anticipated change in the direction in movement of a stock
price. The goal of swing trading is to buy an options contract around the time
it is going to change direction. This change of direction, or ‘swing,’ allows the
trader to buy at a low price and then to take advantage of part or all of the
swing in the opposite direction.
In many scenarios that are well suited to applying a swing
trading strategy, a stock price has been trending downwards for a while.
However, there is an event on the horizon, such as a new product launch, or a
merger or the signing of a major deal. This event, or catalyst, is expected to jolt
the price out of its downward movement, and swinging strongly upwards.
While it is not easy, or perhaps even possible, to predict
the exact time at which the price is lowest, analysis can pinpoint fairly
closely the optimum time to enter the trade. Buying just before or after the
price hits its lowest point positions a trader for gaining the most potential
profit from the trade.
Once a trader has entered a swing trade at a desirable
price, the next consideration is how long to ride the upward movement. Again,
analysis and careful monitoring can ensure that a trader attains the best
possible advantage from the trade.
It is important not to get caught out by holding onto a
swing trade too long, believing that the sky is the limit. Doing this may
result in your trade hitting the branch of a high tree, and plummeting before
you have a chance to secure your profit.
There are various strategies that can also be applied within
the strategy of swing trading that can help you to protect some or all of your
profit. These include the use of stop limits and in the case of having multiple
contracts, selling these contracts at different price points.