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Swing & Momentum

Investors and traders use various methods to identify stocks that are likely to move higher.� Do you buy low or buy high?�� Well the traditional logic would say you buy low and sell high, but others would say you should buy a stock when it is high and sell it when it is even higher.� At first glance we might laugh at such a plan, but there IS a place in a traders toolbox for such thinking.� These two different stock trading styles are �Swing Trading� and �Momentum Trading�.� Let�s take look at what these trading methods entail and what we can learn from each discipline.� If you look for a stock that has a depressed share price with a reasonable belief that in the near-term it can be sold for a higher price, then you are likely a swing trader.� If you look for a stock that has been recently moving higher and looks to continue in an upward direction, then you are likely a momentum trader.� The swing trader looks for the stock that oscillates up and down within a trading range or price channel and tries to buy it at the bottom of its range and sell it near the top of its range.� Now what are the advantages and disadvantages of the two trading styles?� The swing trader tries to buy a stock when its low but many would say that a stock is low priced for good reason and is fairly valued at those levels.� But we all know that stocks aren�t fairly priced every day and they are frequently over and under priced due to many factors.� The trap is some stocks ARE deservingly trading at a value lower than it has recently traded.� The swing trader needs to observe the price action of the stock and identify when the stock is no longer moving down and is beginning to move higher.� Not an easy feat, yet doable with good price charting and technical analysis software.� Some stocks do follow the laws of physics related to momentum and seem to just steadily crawl higher.� The quicksand in momentum trading is a stock that has run up over a long period frequently can become overpriced and when it does move lower it can do so with the characteristics of a rock dropped from 30,000 feet.� Identifying the end of the run of a stock with a lot of momentum again is easier to identify with good charting software.� The saving grace for both swing and momentum traders is the stop order.� Placed just below the price you purchase the security at and moved up if your buy premise was correct can allow for significant gains and preserve profits.