Day Trading or Swing Trading: An Analysis of Stock Market

A stock market is a place where shares of companies are sold and bought – a trading activity. The very purpose of a share market is to collect capital from investors for companies through selling ownership rights (i.e. stocks and shares). In return, companies offer dividends against each share.

Investors are the ultimate owners of a company. The number of shares indicates ownership strength of a shareholder. Over time, frequent ownership changing of shares has emerged. This brings capital gain or loss. As a result, a share brings dividends and capital gain or loss.

Investors & Speculators in Stock Market

The share market has two types of stock traders: investors and speculators.

An investor dominantly considers dividends while a speculator chiefly looks at capital gain or loss. The investor starts with the fundamental factors while the speculator begins with the technical factors. An investor makes moves with patience while a speculator exploits the market sentiments.

Dividend and capital gain or loss exhibit trends and swings of the stock market. Investors and speculators take a risk on account of uncertain trends and swings. They either realize benefits or incur losses.

The stock market offers a way to transfer risky investments from people who do not want to bear the risk to the people who are willing to bear the risk. That is, if they are sufficiently compensated for it. A stock market is a place for risk-sharing for companies’ growth.

Whenever a shareholder researches a company’s fundamental and technical factors, he or she learns about the Organizational Behavior (OB) of the company. The research effort of investors and speculators enhances the business acumen of shareholders. This is the learning effect of the share market. A knowledge worker must get some monetary benefits in the share trading business.

Trends in Stock Market

We live in a versatile universe. Everything in our cosmic economy, animate or inanimate, has a constant portion, variable segment, repetitive content, and evolutionary features. This feature exhibits a predictable behavior.

For example, seasons are limited, repetitive and follow a pattern. On account of available seasonal data, a reasonably accurate prediction of seasons’ behaviors is statistically possible.

Human behavior has some definite personality dimensions owing to naturally endowed intelligences and instincts. The prominent intelligences are:

  • Perceptual intelligence,
  • Emotional intelligence, &
  • Execution intelligence.

The major human instincts are:

  • Parental instincts,
  • Gregarious instincts,
  • Learning instincts, &
  • Sex instincts.

The presence or absence of some intelligence or instinct content shapes countless human mindsets and behaviors. Such as fear, greed, haste, panic, love, hate, speculation, and prudence.

The economic behavior of humans is the outcome of multiple emotions and perceptions. For example, buying and selling shares in the stock market are ascertained, quantitatively, through price and volume movement. The edifice of technical analysis is thus based on Revealed Preferences, i.e., actual buying and selling of shares of a company.

In economics, trend is defined as “the general direction of a market or an asset’s price.” It 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 and volume is a major concern of technical analysis.

A better understanding of stock market trends gives a competitive advantage to traders, both investors and speculators.

More About Trends…

Generally, a trend in the share market exhibits three durations: short-term, medium-term and long-term. 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. Trends that last for longer periods are referred to as long-term trends.

The terms bull (up) and bear (down) market generally refer to cyclical gains or losses of 15% to 20% or more. The up or down stock market cycle generally lasts from several months to a few years. Over 10 to 20-year periods, the stock market cycles exhibit multiple bull and bear markets. These longer-term cycles of the stock market are called “secular” bull and bear markets.

Whenever a trend in the stock market changes its direction, it is called the turning point of the trend. A turning point is based on the buyers and sellers’ collective behaviors, both static and dynamic. It reveals some predictable features.

Technically, the turning points of trends in the stock market indicate resistance or support prices. Resistance or support prices are the signs of the existence of a static dimension of a collective mindset. The changes in resistance or support level are due to the dynamic nature of the collective human self.

The static behavior of economic agents is the very basis of static economic analysis. The shifting behavior of economic agents indicates dynamism and demands a dynamic analysis for a true understanding of economic behavior.

Consequently, 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 Trends 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. Profit opportunities in the share market develop by the hour. An astute trader who understands can take advantage of these trends. Know more, Grow more!

Some short-term trends signal the beginning of longer-term trends in the stock market. Investors and speculators who find these looming possibilities can profit before everyone else figure out that a trend has begun.

A share of a company in the stock market has intrinsic as well as market value. The intrinsic value of a share is due to the company’s fundamentals. The market value is determined by the demand and supply situation of a share at a given point in time.

In the long run, the intrinsic value and market value of a share in a stock market coincide with each other. But there is a divergence between intrinsic value and market value during short and medium periods of trends. A wise investor or smart speculator captures the opportunity of divergence of prices. This helps him or her to realize profit or capital gain on investment during stock trading.

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 materializes an actual trade.

The entering decision is more of an art than a science. It tends to depend on the existing trading activity, market sentiments, and personal risk-return assessment.

Portfolio management and exiting, on the other hand, is dominantly a science rather than an art. The actual profit or loss is decisive at the time of exit.

Day Trading Vs. Swing Trading

Day trading in the stock market means you open and close trades during the same day. The dominant consideration during day trading is the phenomenon of support and resistance.

Daily trends of the stock market play a decisive role in day trading activities. Day trading is chiefly based on the fizzling emotions of buyers and sellers. The linkages between bubble emotions (i.e. greed, fear, etc.) with investors’ mindset (i.e., bull, bear, etc.) create situations for capital gain or loss in the stock market.

Normally, the movement of a share’s price exhibits trends with repetitive swings. Swings create opportunities for some capital gain, now and again.

Swing trading is an investment activity in stock markets where a tradable asset is held for between one to several days to profit from price changes or swings.

Swing trading provides for a much larger profit potential than day trading.

A swing trader does not place trades daily. Swing trading requires more patience and understanding of the stock market. Investors may hold the trade for a few days or weeks. It really depends on how well the trends and swings are of the stock.

Generally, a swing trader defines a satisfaction level about the duration of swing. But unexpected longevity or shortening of a trend may increase the trader’s anxiety level or can disturb his or her comfort zone. These moments are where a novice swing trader might take impatient decisions.

Swing trading demands poised behavior and thorough research of a share, company, industry, and economy.

A swing trader must have knowledge and understanding of the fundamental and technical factors of the stock market.

Suggestions for Swing Trading

A seasoned swing trader buys when people are selling and sells when people are buying.

This is because of his or her better understanding of forthcoming trends and swings of shares.

The swing trader does not overreact to news, events, and sentiments. He or she 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 an 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.”

Conclusion: Day Trading or Swing Trading?

In day trading, investors have small targets for profit. In swing trading, investors have fairly big targets for profit.

The realization of targets depends on a better understanding of the trends of the share market and the behavioral strength of investors towards market trends.

An impatient or non-strategist trader loses money while a patient and strategist trader gains money.

A trade-off situation appears when the day trading target is feasible but the swing trading target is uncertain. The selection of one target is achieved at the cost of the other.

The opportunity cost of day trading profit is swing trading profit or vice versa.

A swing trader prefers dividend earning so he or she acts proactively during book closure days of a company.

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