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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.

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