Day Trading or Swing Trading – A Comparative Analysis
A stock market is a place where shares of companies are sold and bought. The very purpose of a stock market is to collect capital from investors for companies through selling ownership rights (i.e., shares) and, in return, companies offer dividends against each share. Investors are ultimate owners of a company, so that, the number of shares indicates ownership strength of a shareholder. With the passage of time, the phenomenon of frequent ownership changing of shares has emerged; it brings capital gain/loss. A share, thus, brings dividend and capital gain or loss. Consequently, a stock market has two types of traders – investor and speculator. An Investor considers dominantly dividends while the speculator looks chiefly capital gain or loss. An investor starts with fundamental factors while the speculator begins with technical factors. An investor makes moves with patience while speculator exploits market sentiments. It is interesting to note that dividend and capital gain or loss exhibit trends and swings. Investor/speculator takes a risk on account of uncertain trends and swings; consequently, they realize benefits or incur a loss. Concisely, the stock market offers a way to transfer risky investments from people who do not want to bear risk to people who are willing to bear risk if they are sufficiently compensated for it; it is an act of risk sharing for company’s growth. In addition, whenever, a shareholder researches the company fundamentals and technical, he/she learns about Organizational Behavior (OB) of the company. The research effort enhances the business acumen of shareholders, a learning effect of the stock market. A knowledge worker must get some monetary benefits in share business.
Trend Phenomena in Stock Market
We live in versatile universe. Anything of our cosmic economy, animate or inanimate, has constant portion, variable segment, repetitive content and evolutionary features, so that, it exhibits a predictable behavior. For example, seasons are limited and follow a pattern; moreover, they are repetitive. On account of available seasonal data, a reasonably accurate prediction of seasons’ behavior is statistically possible. Human behavior has some definite personality dimensions owing to naturally endowed intelligences and instincts. The prominent intelligences are perceptual intelligences, emotional intelligences and execution intelligences, while, the major instincts are parental instinct, gregarious instinct, learning instinct, and sex instinct. The presence or absence of some intelligence/instinct content shapes countless human mindsets/behaviors such as fear, greed, haste, panic, love, hate, speculation and prudence. The economic behavior, e.g., demand of something, is outcome of multiple emotions and perceptions. The economic behavior, buying and selling of shares, is ascertained, quantitatively, through price/volume movement. The edifice of technical analysis is thus based on Revealed Preferences, i.e., actual buying and selling of shares. In economics, the term “trend” refers to the sustained movement of price. In share market trends, volume works together with price action. The separation of chaotic behavior from trend movement of price/volume is major concern of technical analysis. The better understanding of trends gives competitive advantage to traders, both investor and speculator.
A trend, generally, exhibits three durations, i.e., short-term, medium-term and long-term. Normally, traders consider a trend lasting from a few days to a few weeks a short term-trend, durations covering anywhere from a few weeks to a few months are considered medium-term and longer time periods are referred to as long-term trend.
The terms bull (up) and bear (down) market generally refer to cyclical gains or losses of 15% to 20% or more. Each up or down market cycle generally lasts from several months to a few years. Over 10 to 20 year periods, the stock market cycles exhibits multiple bull and bear markets. These longer term cycles are called “secular” bull and bear markets.
Whenever, a trend changes its direction, it is called the turning point of trend. A turning point is based on buyers/sellers collective behaviors, both static and dynamic, so that it reveals some predictable features. Technically, the turning points indicate resistance or support prices. The resistance/support prices are the signs of the existence of static dimension of a collective mindset, while the change in resistance/support level is due to dynamic nature of collective human self. The static behavior of economic agents is very basis of static economic analysis and the shifting behavior of economic agents indicates dynamism and demands a dynamic analysis for true understanding of economic behavior. Consequently, the static-comparative and dynamic analysis is used to ascertain changing economic variables. The prominent statistical tools for analysis are average, standard deviation and correlation.
Benefits of Trend Phenomena
It is said, trends are friends. Although the stock market has long-term trends, investors can also spot daily or weekly or monthly trends. Profits opportunities develop by the hour, and an astute trader who understands, know more grow more, can take advantage of these trends. Some short trends signal the beginning of longer-term moves in the market. Investors/speculators who find these looming possibilities can profit before everyone else figures out that a trend has begun.
A share has intrinsic as well as market value. The intrinsic value of a share is due to company fundamentals, while the market value is determined by demand and supply situation of a share at a given point of time. In the long run, the intrinsic value and market value of a share coincide with each other, but, there is divergence between intrinsic value and market value during short and medium periods. A wise investor/smart speculator captures the opportunity of divergence of prices and realizes the profit or capital gain on investment.
The entry and exit are two distinct aspects of stock trading. The entry of a trader is the exit of another trader. The opposite risk-return approach of traders materialize an actual trade. The entering decision is more of an art than a science, and it tends to depend on the existing trading activity, market sentiments and personal risk-return assessment. The portfolio management and exiting, on the other hand, is dominantly a science rather than an art. The actual profit/loss is decisive at the time of exit.
Day Trading Vs. Swing Trading
Day trading means you open and close trades during the same day. The dominant consideration during day trading is phenomenon of support and resistance. The phenomenon of daily trends plays decisive role in day trading activities. Day trading is based on, chiefly, fizzling emotions of buyers and sellers. The linkage between bubble emotions (i.e., greed, fear, etc.) with investors’ mindset (i.e., bull, bear, etc,) creates situations for capital gain or loss.
The movement of a share price, normally, exhibits trends with repetitive swings. The phenomenon of swings creates an opportunity of capital gain, now and again. Swing trading is an investment activity in financial markets where a tradable asset is held for between one to several days in an effort to profit from price changes or ‘swings’. A swing trader does not place trades daily. Swing trading provides for a much larger profit potential than day trading. Swing trading requires more patience and understanding of stock market. Investor may hold the trade for a few days or weeks. It really depends on how well the stock trends/swings. Generally, a swing trader defines a satisfaction level about duration of swing, but, due to unexpected longevity or shortening of trend, may increase his anxiety level or can disturb the comfort zone, these moments are critical a novice swing investor might take impatient decisions. Swing trading demands poised behavior and thorough research, fundamental and technical, of a share, company, industry and economy. A seasoned swing trader buys when people are selling and sell when people are buying through better understanding of forthcoming trends and swings, so that, he does not over-react to news, events and sentiments. He enjoys the riding of a trend until there are signs of reversal or retracement. Market experts define and suggest to swing-traders, “Retracements are temporary price reversals that take place within a larger trend. The key here is that these price reversals are temporary, and do not indicate a change in the larger trend. Trend without retracement is unhealthy or dangerous trend. Since the definition of a trend is “a series of higher highs and higher lows,” then, logically speaking, the trend has to be over when the stock fails to establish a higher high and sets a lower low instead. A lower high is unhealthy, but it is not the end of the trend. It is possible that after setting a lower high the stock could retrace again, never setting a lower low, and then push above the previous high to a higher high. The nail in the coffin of a bullish trend is the establishment of the lower low. Once the lower low is in place, normally, trend is over. This is called a Reversal.”
In day trading, investor has small targets for profit. In swing trading, investor has fairly big targets for profits. The realizations of targets depend on better understanding of trends and behavioral strength of investor towards market trends. An impatient / non-strategist loses money while patient and strategist gains money. A trade-off situation appears when day trading target is apparently feasible but swing trading target is uncertain. The selection of one target is achieved at the cost of other, i.e., the opportunity cost of day trading profit is swing trading profit or vice versa. A swing trader prefers dividend earning so he acts proactively during book closure days of a company.