The amount of swing that can occur during any trade is limited. That’s because it takes two trades for the stock that is currently in place to reach an equilibrium price or swing equilibrium price. A swing trade that involves one swing is referred to as “one-swing” trade. The term was first used by Charles Schwab in 1992. A “two-swing” trade involves two swing trades. This happens when we enter one swing trade and end the same way. If we did not enter or exit the same way, the price would have to rise and fall to get back to equilibrium.
In stocks, there will always be some level of volatility, and it can be quite low. This is why stocks are trading on a bell curve. A stock’s volatility can rise and fall at any time in a given day and hour, making it difficult to predict what direction the stock will move. This volatility is considered to be price risk, which can lead to higher risk in the long run. The volatility in individual stocks is expected to be a function of the time horizon in which the company was founded. We can assume for now that volatility will increase due to the greater exposure for new companies.
An early stock would likely be volatile (price risk) and therefore trade closer to its current price in a single trade. This would be more likely for a new company.
A company with a long history and a higher market cap would be in a two-swing equilibrium. This could be the case for companies which have a longer history and a higher market cap and would move closer to the current price in a single swing. This could be true for new companies as well.
The risk of short-term volatility will be greater in stocks that have long histories and a higher market cap, while there is a higher risk of long-term volatility in stocks with smaller amounts of capital (capital growth).
A company that has a lower share price risk in stocks with a higher share price risk could be expected to have a greater risk of short-term volatility.
This story was co-published with NPR. The opinions expressed are author’s alone, not those of the Brennan Center for Justice at New York University School of Law.
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