Swing Trading: Profit Booking Riding On Short Term Market Sentiments

Rather than focusing on company research or investigations of a particular sector, the swing trader will look at short term pricing, and will make decisions to buy or sell a stock based on weekly or monthly prices. Such traders will only hold onto a stock for a short period of time, usually not more than a couple of weeks, and thus do not need to spend time getting to know the intimate details of a company.

A strategy of swing traders is to take advantage of general market fluctuations. There are periods of time when the market can be expected to rise of fall based on the sentiments of the general population of shareholders. In general, during certain periods, one can see that the general drift of markets is going in a particular direction, so swing traders can use this to their advantage by investing for a short time in large-cap, established companies that will likely float along with the general direction of the market.

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.

An area where traders involved in short-term trading loose money is capital-gains tax. The present tax structure is highly skewed in favor of long term investors. The tax levied on capital gains upon a realization of profits is much higher if the profits are booked on swing trading stocks.

For inexperienced investors, swing trading is actually a good trading style. This is because such investors, who can be impatient to see profits, don't have enough expertise to conduct long term market trend analysis. Swing trading offers investors short-term profits, even if they could have made substantially higher profits had they invested for longer and carried out trend analysis.

This style of trading stocks doesn't follow fixed guidelines. No two swing traders are ever alike in the way their form their judgments or make their decisions. Some swing traders also use statistical analysis. These analysis techniques include the use of exponential moving averages. That said, swing trading still relies heavily on hunches.

Swing trading investors hold stocks for short periods of time and cash in on the short-term movement of stocks or indices. These investors take advantage of market fluctuations and will often invest in large-cap, well established companies whose stock tends to follow market sentiment. Short-term trading will result in higher capital-gains tax, as governments tend to favor long-term investors. Despite this, it is a good method of trading stocks for novice investors who may prefer smaller short-term profits instead of the higher return associated with long-term trading and in-depth analysis.

by MARK CRISP

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