Trading over the course of a day is not the only trading timescale, and for most people it would be impractical. For those people, it may be more effective and prudent to consider placing trades that should play out over the course of a few days or even weeks. This is swing trading.
Swing Trading Explained
Swing trading is a longer-term trading style than day trading, in which the trader aims to benefit from short-to-medium-term price fluctuations when a financial instrument trades within a “trading range”. In the example that follows, you will see how it is possible to capture several profits over the course of a few weeks by buying a stock (or other financial instrument) when the price approaches the bottom of a trading range and then selling it when the price approaches the top of a trading range.
Swing Trading Example
In the following chart, look at how the price of the FTSE 100 index moved up and down within a trading range while (on the grand scale) going nowhere but sideways. By repeatedly buying the FTSE 100 index at a price of 5000 and then selling at a price of 5300, the swing trader was able to bank four lots of £300 profit (assuming a nominal £1-per-point spread bet) during the two months that the FTSE apparently “went nowhere”.
The even better news is that the trader who was willing to go short as well as long, by selling short at 5300 each time rather than merely selling out, could have banked an additional 3 x £300 on his £1-per-point spread bets. So in total there was a possible £2100 on offer here per £1-per-point bet; or – for all of you high rollers out there – a possible £21,000 for just two months work with a £10-per-point spread bet.
The downside (and there always is one) is that a £10-per-point spread bet on the FTSE 100 at 5000 would imply risking a massive £50,000 if we assumed that it was possible for the entire index to “go bust”. The spread betting company would flatter you by asking for a much lower deposit in order to take the trade, but you could still be taking a big risk that is disproportionate to the amount of profit on offer… unless you were able to limit your risk absolutely using a guaranteed stop order (which we’ll discuss later).
The other downside to swing trading (okay, there are two downsides rather than one) is that in all likelihood that trader could not have known in advance that the price levels of 5000 and 5300 would denote the optimal buying and selling prices. He could only really have deduced that there was a “trading range” once it had played out a while, by which time – you guessed it – it may have been too late.