The financial markets can be enormously complex but most trading strategies fall into just one of two categories: trend trading or swing trading. Both rely on charting the price directions over time of individual stocks:
- Trend traders track the price trends of individual stocks over time to pinpoint the ones that are entering an upward (or downward) trend. They buy those stocks and hold them for as long as the trend lasts.
- Swing traders focus on the relatively minor ups and downs in prices that all stocks experience over the short term. They identify low points when a stock is a bargain and high points at which it is likely to retreat again. They buy and sell frequently to take advantage of these price gyrations.
Key Takeaways
- Trend traders chart price movements to identify the stocks that are moving steadily in an upward (or downward) direction.
- Swing traders track the price patterns of individual stocks over time and buy and sell them when they hit pre-determined levels of support and resistance.
- Trend traders generally buy for the long term, or as long as the trend lasts.
- Swing traders buy and sell more frequently, taking advantage of the short-term seesaw action of stock prices.
Trends and Swings
Trend trading and swing trading each have advantages and disadvantages as well as specific requirements that investors must follow consistently to avoid errors. Randomly applying these contrary strategies can undermine profitability.
First, you need to identify whether you are a trend trader or a swing trader in order to hone your strategy correctly.
Broadly speaking, trend traders are watching macro influences that move the price of a stock over the long term. Swing traders focus squarely on short-term price action to make buy and sell decisions.
The trend trader is taking a risk on an uptrend or downtrend and is content to hold onto stocks until the trend changes. The swing trader works within the boundaries of range-bound markets, buying at pre-determined support levels and selling at resistance levels.
Swing trading tends to work best for shorter time frames, while trend-following strategies can be applied for months.
These lines have blurred in recent years due to the availability of real-time charting for all time intervals.
Which One Fits Your Style?
New traders should choose one of these disciplines early on and stick with it until they’ve mastered it or decided they’re better suited to the other approach.
Experienced traders can mix and match strategies at will, often building highly effective hybrids that require strong discipline but produce excellent bottom-line results.
This dual effort works best for those with strong multi-tasking skills who can contain each strategy within its proper boundaries while adjusting risk management to address the unique characteristics of hybrid strategies.
For example, long-side swing trades require fast exits at resistance levels such as former highs, while trend-followers might sit on their hands and allow a stock’s price to test and break those levels. A hybrid approach might be to sell half the position at the resistance level, keeping the other half in the hope of a breakout.
Trend Trader vs. Swing Trader
The trading characteristics below will help you identify the approach that suits you best.
The 80-20 Rule
The 80-20 rule asserts that markets trend only about 20% of the time while spending 80% of the time grinding through a narrow trading range.
The price rate of change rises in trends, attracting the trend trader, and falls in trading ranges, attracting the swing trader.
Trade Frequency
Swing traders buy and sell more often for shorter time frames. Trend traders buy and sell less frequently and hold onto stocks longer.
Position Selection
Trend traders own stocks with the strongest uptrends and short-sell them with the strongest downtrends.
Swing traders buy or short-sell stocks when their prices hit specific pre-determined support or resistance levels.
Position Size
Swing traders hold larger positions for shorter time frames, while trend traders hold smaller positions for longer time frames.
Swing traders apply leverage more often than trend traders, meaning they’re apt to borrow money to increase the size of their stakes.
Position Timing
Swing traders seek perfect timing because the average win or loss for them is smaller than for trend traders.
Trend traders can miss the beginning or end of a trend and still book substantial profits.
Entry Strategy
Trend traders buy while momentum is strong or wait for a counter-trend to lower risk.
Swing traders take their risks at support or resistance levels, and may offset the risks by positioning in the opposite direction and placing stops to prevent big losses.
Important
Whether you’re a trend trader or a swing trader, your profitability will depend on your ability to apply technical tools to your analysis of a sector or stock. These tools are available on trading platforms and websites that offer stock analysis and charting programs.
Exit Strategy
Swing traders exit positions when stops are hit or profit targets are reached.
Trend traders hold their positions until the trend changes, regardless of the time frame. They place stops at the price level that signals the trend change.
Which Is Better: Trend Trading or Swing Trading?
You can make money (or lose it) in the stock market using a trend trading approach or a swing trading approach.
The important part is deciding which you want to be, and sticking to it.
Trend traders are looking farther down the road, trying to pick the stocks that are responding most effectively to market-moving economic, social, or technological changes.
Swing traders are responding to the constant ups and downs of stock prices during the trading day to pinpoint the precise time to buy and sell.
Is Trend Trading All About Macroeconomic Events?
No. Many traders who would identify themselves as trend traders are not tracking external macro trends. They’re tracking the price trends of stocks to identify those that are moving steadily upwards (or downwards) over time.
This is very different from the strategy adopted by swing traders, who are following the 80-20 rule, which says that most stocks spend most of their time moving up and down in small increments. Trend traders are looking longer-term at the general direction of a stock price.
Is Swing Trading the Same as Day Trading?
Swing traders would deny that they are day traders.
Day traders may flip shares throughout the day, making split-second trades as prices move fractionally. Day traders almost never hold a stock overnight.
Swing traders may hold onto a stock for days or weeks. They have identified in advance the price targets at which they plan to sell, and they don’t sell until that price is reached.
The Bottom Line
Swing traders and trend traders execute market timing strategies that require different skill sets. Experienced players can successfully mix and match these strategies. New traders should focus on one approach and stick with it until it’s fully mastered.
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