Using Swing Trading to Profit in Volatile Markets

Jay Peroni, Lead Analyst, CEO and FounderBlog (Public), Crisis Investor, Growth Investing

Swing Trading Strategies

Swing trading is the name given to an investment strategy that involves using very short-term trading patterns in stocks. It’s the exact opposite of buy-and-hold, where you buy a certain stock that has strong fundamentals, and hold on for many years while the stock increases in price over the long-term.

Swing trading may be a better way to profit in volatile markets, since those markets don’t offer the predictability that favors more traditional investing methods.

What Is Swing Trading?

Swing trading essentially ignores fundamentals. Positions are taken for only a few days at a time, and sometimes for as little as one day. The swing trader uses technical analysis to take advantage of short-term price swings. The idea is to buy into a stock at an opportune moment, and then to sell quickly for a small profit.

The bigger picture strategy is to engage swing trading over multiple trades, creating multiple small profits that and up to be big profits overall.

How Swing Trading Can Be Profitable In a Volatile Market

Speed is an essential ingredient in swing trading. Sometimes considered a form of daytrading, swing trading is a strategy used mostly by small investors. Because they are moving small amounts of money and operating independently, they can use speed to their advantage in a way that large institutional investors cannot.

Speed is also an essential asset in dealing with volatile markets, since trends change more quickly in the face of volatility than they do in more predictable long-term bull markets.

Even in volatile markets, short-term trends emerge as patterns. For example, the market may sell off for certain periods time, or decline by a certain percentage, but show a pattern of consistent recovery, if only partial, in the aftermath of declines of a certain percentage or duration.

If the trader is able to identify those trends, you’ll be able to establish predictable – though not guaranteed – entry and exit points in the market.

Bullish Versus Bearish Trades

Trends indicating patterns of decline and recovery identify short-term investment opportunities in both directions. For example, a trader may buy stocks at the bottom of short-term market declines, and then sell those positions after a reasonable recovery in prices has occurred.

The same trends also open the possibility of short sale opportunities. For example, the trader may decide to short sell certain stocks after a market recovery, only to buy them back and earn a profit after a short-term selloff.

Technical Versus Fundamental Analysis

This gets to the very heart of swing trading. It is based on technical analysis, which focuses attention on the market performance of a given security. The technical analyst looks at price and volume patterns, and then executes trades based on those patents. Fundamental analysis is ignored in this type of strategy.

Fundamental analysis looks at the underlying value of the company behind the stock. For example, fundamental analysis will consider a stock’s price-to-earnings ratio, its book value, the position of the company in its industry, and many other factors that measure the intrinsic value of the company’s stock.

Technical analysis facilitates short-term trading, like swing trading, while fundamental analysis is the cornerstone of buy-and-hold investing.

Using Trends To Trade: Advantages And Disadvantages

Trends are critical to swing trading. The swing trader is making trades based entirely on patterns in both the stock price and the market. Because of human nature, markets tend to move in predictable patterns, even though they can seem chaotic to the casual observer. The technical analyst is well aware of that predictability, and works to measure it to the point where it becomes a fairly reliable indicator of market performance.

Using technical analysis and trends, the swing trader is able to create profitable trades, while the buy-and-hold investor watches his investment portfolio stairstep down predictably.

However there is a downside to trading on trends, and that’s that trends can change. For example, the market may suddenly trade in broader patterns. While it may go for a time declining by 5%, then recovering by 3%, the trend investor will lose money if he buys in after a 5% decline, and the market falls by 15%.

This is a risk that trend traders take, but they do so with the understanding that, ironically, short-term trading is a long-term venture, and they will return to profitability after reevaluating the shifting trends.

Using Relative Strength

It might be an oversimplification to say that relative strength is a strategy of “going with the winners” – or maybe it isn’t.

Relative strength focuses investing in stocks that are outperforming the general market. That is, investing in the market leaders, for as long as they are leaders. It’s a form of momentum investing, in which you invest in a stock that has been very strong in recent months, but you expect to get still stronger.

Relative strength has been defined as “buy high, and sell higher”. Using this strategy, you invest in stocks that are regularly setting new highs. You will ignore the possibility that the stock may be overpriced at the point where you buy it, fully prepared ride it as high as it will go.

This is more a form of technical analysis than of fundamental analysis, since it essentially ignores fundamentals and goes with the prevailing price trend.

At the risk of engaging in semantics, investing on relative strength works for as long as it works. And sometimes it can work with a single stock for several years, as the stock progressively hits new highs.

The basic disadvantage is that you can hold on to a stock until it reaches unsustainable levels. Since stocks tend to crash in price much more quickly than they rise, a 100% gain in the stock price over the course of the year could turn into a 50% loss in just a couple of months. It is conceivable that that kind of damage could be done before you recognize that the stock no longer represents relative strength.

Limiting Position Size

One of the best ways to limit the downside of any of these trading strategies, whether it is swing trading, technical analysis, trends, or relative strength, is to set limits on your trading activity.

One way to do this is by limiting your position size. For example, if you set a limit of investing no more than 2% of your portfolio in any asset position, you will minimize the loss on that position even if the asset price goes to zero. Limiting your position size will also make it easier for you to remove your emotions from your investing activities. The less money that you have invested in any single asset, the more detached and professional you can be in handling it.

You should also create an exit strategy for each investment position that you have. That starts by setting a maximum loss that you are willing to accept on any single investment. That will help to minimize your losses, particularly in the event that a predictable trend suddenly becomes less predictable.

You should also have a profit target, and this is more important than it seems at first glance. But since you’re engaging short-term trading, you need to develop a form of discipline that prevents you from getting overly greedy.

For example, let’s say you buy into an investment rises by 10% in just a few days. You decide that if 10% is good, 20% is even better, so you hold a little bit longer. The trend doesn’t cooperate with your desire for higher profits, and instead of rising by 20%, the stock reverses and you end up with a 5% loss.

Swing trading is not long-term investing, so you have to be mentally disciplined to take your profits and move on. Setting limits will help you make that happen, even if those limits often seem to work against you.

Swing trading to can work as an alternative investment strategy in which you commit a relatively small percentage of your portfolio to. This is especially true if you have no experience doing it. The last thing you want to do is to trade yourself into poverty, especially in a volatile and declining market situation.


Additional Reading:

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Will Gold Protect You During an Economic Crisis?

How Will You Protect Your Portfolio During a Crisis?

Want to Make a Fortune? Buy Stocks at Depressed Prices!

How to Hedge Your Portfolio


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While Dual Returns has used reasonable efforts to obtain information from reliable sources, we make no representations or warranties as to the accuracy, reliability, or completeness of third-party information presented herein. The sole purpose of this analysis is information. Nothing presented herein is, or is intended to constitute investment advice. Consult your financial advisor before making investment decisions.