IT might be tempting for a trader to despair in these markets. Volatility is low – as measured by the CBOE’s Volatility Index it is below the 30 mark, compared with 89 in October. There is little movement anywhere. Take for example the FTSE 100, which is stuck in the 4,300-4,500 range. Day trading has become a non-starter for most traders. A security’s movement will simply be too small to make much money.
But there are things that you can do in markets like these where there is little volatility, the market is range-bound and the trend is sideways-moving.
When you are swing trading, you hold positions for less time than when you are trend trading, but longer than for a day trade. Trend trading requires considerable discipline to remain in a position for so long without taking profits, and traders will not be able to benefit from any short-term retracements in the price.
In contrast, swing traders will typically focus on the short- to medium-term and like to capitalise on a potential turn in the market, says Angus Campbell, head of sales at CFD-provider Capital Spreads. Swing traders can stay in a position for anything from a few days to a few weeks depending on sentiment and the markets’ response to fundamental news such as corporate earnings. Because they are looking to capitalise on a market movement over a greater number of days, swing traders will normally target a larger profit.
Swing trading is more cost effective than day trading where dozens of trades can be made each day and so traders’ commission charges can be high.
However, swing trading also requires considerable knowledge. You need to determine your precise entry and exit points by using support and resistance levels as well as more complex technical analysis to predict bullish and bearish moves.
But successful swing trading requires being highly selective about your positions – not all assets are prone to consistently large moves.
Mining shares are particularly good for swing trading because of their high beta – a measure of a stock’s volatility in relation to the market as a whole – says Ronnie Chopra, senior derivatives trader at Falcon Securities. He says that his pick for a swing trade sell at the moment would be Vedanta, whose price has more than trebled since March. “It now looks extremely over-bought and pricey on fundamentals as the share price crosses £17 per share.”
Chopra also points to financial stocks as ripe for swing trades. “Financials have benefited from the change in sentiment in recent weeks. Barclays has been a major beneficiary of the swing trade, rising from 60p in March to the current 316.50p.”
While Lloyds Banking Group has not been fortunate enough so far to benefit from the greater optimism surrounding the banking sector, it may well rally strongly once the economy shows signs of recovery.
Currency pairs are also popular targets for swing traders because of the relative high volatility and liquidity of the forex market. Currency pairs like cable and the commodity currencies against the US dollar have seen swings back and forth driven by investors’ appetite for risk.
For those without the time or experience to focus on serious day trading, making the most of the swings in the markets still offers the chance for CFD traders to profit even when the long-term trend is sideways.