The basic premise of stock trading is that stocks move in trends. Once a trend starts, it is likely to continue. Traders make profits by recognizing a trend early, buying a stock for the duration of the trend and selling as soon as it has run its course. Both position and swing trading are based on trend following; the difference is trend duration.
The Dow Theory classifies trends as long-term, or primary – bull and bear markets lasting several years each; intermediate term, lasting several months; and short-term, lasting several days. A long-term trend consists of several intermediate trends interrupted periodically by corrections – trends in the opposite direction. Intermediate trends can be further broken down into short-term trends – essentially daily and weekly price fluctuations. These trends apply to the market as a whole and to individual stocks as well.
Position trading follows intermediate trends. Position traders use fundamental analysis to select buy candidates and technical analysis to pinpoint the correct buy points – breakouts. They buy a stock and hold it for the duration of the trend, typically several months, and ignore short-term fluctuations.
An intermediate trend consists of a series of short-term price swings that typically last several days each. Swing traders try to catch those swings by going in and out of stocks, using primarily technical analysis for buy and sell signals.
Which Is Better?
Both methods have advantages and disadvantages. Position trading works better when a strong trend develops and carries a stock much higher; swing trading works better in a directionless market when stocks frequently go up and down in trading ranges without much progress in either direction. Position trading involves fundamental analysis and is most closely associated with “stock picking” – finding winning stocks, riding them up and then switching to new, more promising candidates. Swing trading is more technical, and swing traders frequently trade in and out of the same stocks over and over again. In the end, it all boils down to personality and style. Position trading would suit you better if you enjoy an analytical approach, like to uncover hidden gems, can sit tight through daily and weekly price swings, and don’t want to be glued to the computer all day to trade frequently, with the slightest change of direction. Swing trading would suit you better if you're excited by market action, enjoy frequent trading and lack the patience to wait out short-term fluctuations to get the full benefit of an intermediate trend.
- Technical Analysis of Stock Trends; Robert D. Edwards, et al.
- Trading for a Living; Alexander Elder