umping into the world of high finance is exciting, but there are a few things you should never do when investing, especially when it comes to swing stocks. If you’re unfamiliar with this type of market option, keep reading to learn the top four things to avoid when swing stock trading.
Introduction to Swing Stocks
Image via Flickr by QuoteInspector
The simplest way to understand swing trading is to see it as a short-term method for buying and selling securities. Even though this type of investing is pretty routine, you don’t hear about them often.
The term “day trading” might sound more familiar, and these typically last less than a day, while swing trading positions typically last between two and six days. The goal is to find trends and gains during that timeframe and capitalize on them, bringing in significant profits.
- Moving Too Slowly
To maximize the value of this trading strategy, you must be able to make quick decisions. Once you uncover a great investment opportunity in a stock that has the potential for big gains in a short time frame, you need to limit downside risk by being vigilant.
Your goal is to hold a position only long enough to capture a larger price and sell before it starts to decline. As the value of a stock moves up the charts, careful positioning requires attention and planning.
- Choosing the Wrong Stock
Like all types of investing, selecting the right swing stock is vital to your success. Large-cap stocks, also called big cap stocks, are the best choice for short-term holds. These options refer to large market companies with values over $10 billion, such as Ford Motor Company.
Large-caps are the most actively traded stocks and account for 91 percent of the market’s shares. They work well for novice investors because they’re transparent and therefore easy to analyze. You’re also banking on stable companies that pay out some of the most significant dividends.
- Short Swinging the Wrong Market
A classic mistake for new investors is short swinging into a downtrend. Market conditions are described as either “bull” on the rise or “bear” on the decline. These trends should be the primary force in determining your position.
Often referred to as “catching a falling knife,” a new investor might be tempted to buy a stock for less as it’s declining. You might assume that it will hit reserve and start gaining again, but that kind of mistake could result in significant losses.
- Leaving Profit on the Table
This habit might sound counterproductive, but for those traders just starting out, it can be a costly error. You’re closely watching a large-cap’s income statement, and its value keeps climbing.
Seeing those dollar signs in your investment account is quite attractive. You might be tempted to hold on for more, but you have to let it go at some point. Once your price reaches your target range, it’s a good idea to sell it and take your profit off the table.
Swing trading offers investors a potentially lucrative trading option. Use this guide to learn to avoid common swing trading mistakes.
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