A friend of mine introduced me to something called momentum trading (also called swing trading) today and it is a pretty interesting concept. So for a quick background, there are two types of trading: swing and trend. Trend is when you are hoping that a stock would go in one direction, either up or down, over a period of time. Swing is when you are hoping the stock will just oscillate in both directions and not really go anywhere. Hence, in bear and bull market extremes, it is wiser to use a trend strategy since the stocks will tend to follow a directional trend. The key challenge with swing trading is to accurately define the market when it is going “nowhere.” This is tough.
However, an industry that came to my mind immediately after hearing this was biotechnology. I have noticed that several biotech company stocks either oscillate continuously or stay near the baseline, going “nowhere.” The reason being that many biotech companies are in the clinical trials and research phase for 5-10 years before releasing their drug. That being said, I wonder if the swing trading approach would work more often than not for the biotech industry…
Sunday, November 2, 2008
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