Swing trading is the opposite of momentum trading. In momentum trading, the idea is to find a developing thrust and then climb aboard, hoping the movement will carry you to a prosperous conclusion. In swing trading, the idea is to enter trades either against the direction of current movement, in expectation of a reversal or "swing" point, or just after the market has reversed its direction, but before it has built up steam.
Volatile options and stocks can reach high and low extremes in price during the day, as traders push prices first in one direction, then in another. As a trader, you can attempt to anticipate when prices have moved an excessive distance from their expected value and are likely to snap back.You can try to buy into momentary dips and sell into momentary rallies. This is also known as countertrend trading, at least in the short term. Anticipating turning points, however, can be quite difficult.
Many times, an option or a future that is down will continue its descent, while one that is high will continue to move up. You could get burned. However, if you can, occasionally, correctly predict a turning point, you can do extremely well because you will be entering the market at an excellent price.
There are many ways traders attempt to determine when reversals or swings are due. Some use oscillators, such as Lane's Stochastic, in an attempt to recognize "overbought" or "oversold" conditions in a market. Others use the tools of classical technical analysis, such as levels of support and resistance. Some simply look for a longer-term trend and then attempt to buy during pullbacks or sell during rallies, always trading, however, in the direction of the trend observed in the longer time frame charts. Using notions like support and resistance can offer an additional benefit beyond the prediction of turning points: knowing when the trade has gone wrong and at exactly what point to exit.
Countertrend or swing trading marries well with the use of limit orders. In most cases, it is easy to get good fills at desired prices because you are not trying to buy into an avalanche of movement. Instead, you are buying when the crowd is selling or selling when everyone is buying. This kind of trading also ties in well with the "contrarian philosophy", which suggests that you do the opposite of what the majority of traders and analysts would do on the basis of their expectations of market behavior.
It is generally harder to swing trade successfully than to trade momentum. In most markets, fewer success stories can be found for this kind of trading. The continuation of moves in markets is frequent, while reversals are less so. Therefore, to a small extent, the odds favor the momentum trader. However, the better fills may overcome the small statistical edge that momentum traders have.
