Swing trading is an investment strategy that aims to secure quick gains, usually within an average period of two to five trading days. Investors who make use of this technique take advantage of drastic but short-term movements in stock prices. In other words, swing traders are more concerned about the price trends and not the actual values of the stocks. The key to this type of stock investing strategy is being able to act fast and capture stocks whose prices can potentially fluctuate within a few days.

Day traders or home-based investors are the ones who make use of swing trading strategies. The intrinsic characteristics of this strategy make it well-suited for individual traders rather than big investment companies. Institutional or large investment firms cannot be involved in swing trades because they hold huge amounts of stocks, preventing them from quickly opening or closing market positions. However, before you dip your hands in this type of investment strategy, you should know that it can present unique challenges for any trader. Here are three typical methods used in swing trading.

1. Trend Following

Swing traders always aim to move in and out of the market in a matter of days or even hours; thus, success in this type of trading depends a lot on being able to choose the right stocks. According to traders, the best stocks for swing trades are those with high capitalization or those that are actively traded in the stock market.

A swing trader who wants to maximize profit potential needs to be able to clearly define stock price trends. Before one can pinpoint the best stocks, there has to be a way of determining the pattern or direction in which stock prices are moving. Trend following lets you know when to enter the market and when to take profits. This method is convenient for swing traders because, within short periods, stocks tend to have consistent price patterns.

2. Scalping

This method is very popular among day traders, more specifically those involved in forex (foreign exchange market) trading. Basically, the process requires taking small gains very quickly and frequently. The potential gains of the trader will be based on the differences between ask and bid prices of the stocks. Bigger differences would mean bigger profit potential.

To limit risks, traders who use the scalping technique must be able to move in and out of the market within a very short time frame, usually a few hours. This will prevent the trader from being exposed to adverse or unfavorable market conditions that can turn stock prices against any trade position. Still, this rapid trading method requires careful market analysis if one wants to maximize or even improve profit potential.

3. News Playing

As the name suggests, this method relies on the news of the day as the basis for trading decisions. Investors who use this method in swing trading would find leads by sorting through major events that are happening daily in the stock market and the business world in general. This method can be effective only if you are willing to sit down for hours every day sifting through business news that is going around not just locally, but also in other parts of the world.

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