A swing low signals that a security has the potential to move sharply higher or lower based on changes in interest rates and short-term interest rates. However, because a swing low will be very short-lived, it can cause traders to get stuck with a bad trade.
A swing low in interest rates can create a sharp increase in the price of a security. But if it is too large (as at the end of the last major U.S. federal bailout – the Fannie Mae and Freddie Mac programs), it can be used to drive a market into a double-dip. If you have a short-term investment and you see a sharp increase in the stock market, your first reaction is likely to be “Wait! Why are investors buying the stock markets? What has caused them to buy so quickly?”
It takes a long time to adjust to changes in interest rates, and you can end up being stuck with a bad trade if that is the case. A short-term investment can also change direction dramatically due to changes in volatility of the market. An investment in a short-term security can be affected by changes in interest rates dramatically, making it difficult or perhaps even impossible to get out of a bad trade.
What does a swing low look like?
Swings lower involve very little risk. The stock price will likely increase (depending on the direction of the rate change). You will get more money back if you sell your short-term investments at a higher price. But you may also be stuck with a bad trade unless that price moves higher.
In contrast, swings high involve relatively little risk (and may even be considered to be short). Your position may be worth more than you thought (depending on the change in price), but it is likely to move sharply higher. The stock price may increase, but the return on the position will likely not be higher than when you purchased it.
Swings in these situations are commonly known as negative and positive ladders.
What are the benefits of moving up and down the ladder?
In general, as you move down the ladder, you get more money back. For example, if you move down from long/short long, you may get as much as an extra 2% or more from your short position, but if you move down from short/short short, you will likely have lost almost everything else your short position created for you.
Additionally, if you do move down the ladder, you are
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