Generally, periods of trending market last a relatively short time in relation to longer sideways market. But rather than stand aside, many traders think they are seeing trends where the market are not trending.
In trending market, fast-moving stock’s prices attract attention and awaken great excitement. Many novice traders fever with these hot plays. The financial press makes these more danger with frantic reporting of big gainers and losers. But gaining profits by momentum trading requires great skill and discipline.
Typically, price seeks equilibrium. When unsettling events destabilize a market, counter-trend force emerges quickly to put it to a stable state. This inevitable backward reaction follows each forward impulse. Novice traders fail to consider this action-reaction cycle when they enter momentum positions. They blindly execute trades that rely on a common but dangerous trending-following strategy, then trend reversals appear suddenly.
Novice traders enter small price swings on the false assumption that the action represents a new breakout for a major trend. Although these errors may not incur large losses, they damage equity and confidence at the same time.
Some traders, in the other hand, may appreciate the market’s complexity and realize that trading mastery requires many diverse skills. As price usually cycles through regular phases, strategy needs to adapt quickly to capitalize on the current crowd. So, swing trading, that execute right near support or resistance, is a powerful alternative. This classic trading style requires more precise planning than momentum. However, it allows measurable risk and highly consistent rewards.
Swing traders seek to exploit direct price thrusts as they enter positions at support or resistance. They analyze chart pattern characteristics to indicate short-term market inefficiencies. The swing trading strategy is a time frame independent methodology. Some traders are able to apply this strategy by never holding a position overnight.
Nowadays, the revolution in high-speed trade execution opens swing strategies that last for minutes instead of days. Dependable price patterns appear on charts in all time frames, swing setups offer the short-term charts the same opportunities that appear on longer-term charts.
Swing trading provides a natural framework to identify changing conditions and apply new methods to exploit them. However, as its core, swing trading is not the opposite of momentum trading. During the times that strong price movement characterizes a market, disciplined momentum strategy becomes the preferred swing trade. In this way, modern swing traders can apply the principles of risk management and price boundaries and use momentum’s greed to their advantage.