What is a Swing?

A swing can either refer to a type of trading strategy or a fluctuation in the value of an asset, liability, or account. This term commonly refers to a situation in which the price of an asset experiences a significant change over a short period. Swing may also be used to reference swing trading, which is a trading strategy where a trader attempts to capture gains by holding a security for a short period, while waiting to see if a trend develops.

Key Takeaways

  • A swing can either refer to a type of trading strategy or a fluctuation in the value of an asset, liability, or account.
  • A swing in the financial markets, which is caused by increased volatility, can be seen easily when the price of certain security undergoes rapid, directional change in value.
  • Swing may also be used to reference swing trading, which is a trading strategy where a trader attempts to capture gains by holding a security for a short period, while waiting to see if a trend develops.

Understanding a Swing

A swing in the financial markets, which is caused by increased volatility, can be seen easily when the price of certain security undergoes rapid, directional change in value. Investors refer to these sharp shifts in price as a market swing. For example, it is not uncommon to see a major index swing from negative territory to positive territory just before the market close, or after an FOMC interest rate announcement.

Swing trading is often used by individual investors to capture profits from the day-to-day fluctuations in a security’s price movement. Traders who use this strategy often use swing highs and swing lows to time their entry and exits points. To find the best stocks to swing trade, many traders use websites that have access to stock market scanners, such as Yahoo Finance, Finviz.com, and StockCharts.com.

On the other hand, financial institutions such as banks, hedge funds, and asset managers do not often have the luxury of swing trading a position over a matter of days, because the large size of their order would usually have too much impact on the price of the asset.

Managing Market Swings: Keep Emotions in Check

Market swings are inevitable. In today’s fast, news-driven environment, it is easy for investors to get caught up in news that can rattle markets. Whether it is legit news or fake news, it has the same effect—it is unnerving and can cause emotional angst. Investors can manage their emotions during market swings by having an investment plan. During times of uncertainty, following a plan helps investors remain calm and ride out the swing.

Market swings present investors with an opportunity to accumulate security's at a discounted price. For example, a 10% drop in the Standard and Poor’s 500 index (S&P 500) allows investors to add some quality names to their portfolio. To manage risk during a market swing, investors can dollar cost average into a stock. To do this, the investor purchases a fixed dollar amount of shares in intervals. For instance, if an investor wants to invest $50,000 into a stock, they might buy it in five $10,000 allotments.