The investing term swing trading refers to individuals that buy securities with the intention of capturing gains in a matter of days or weeks. A swing trader looks to profit from stocks, options and futures contracts exhibiting short-term price momentum.
As is the case with day traders, swing traders rely on technical analysis when making decisions. Also known as momentum trading, swing traders examine the price of securities, looking for near-term trends. They study fundamentals such as earnings growth projections, profitability and leverage ratios when selecting securities.
The profit timeframe for swing traders is usually stated in days or weeks; unlike day traders that close out all positions before the market closes. This approach is thought to be less time demanding than day trading, which requires the constant monitoring of market conditions to capture profits.
The technique allows investors to profit from both upward price movements by buying shares or call options, as well as downward price movements by purchasing puts or shorting stocks. Profits rely on "timing the market," which is at odds with efficient market theories such as the random walk hypothesis. The technique also results in the payment of high trading commissions and fees relative to position trading, which can lower investment returns.