Swing Trading involves holding positions over days and weeks. It works on the principle of capturing a larger trend and thus has little to do with minute-to-minute changes.
It stands out as a mid-term, and moderate trading style, and one can say that it lies somewhere between long-term investing and day trading. It is ideal for a beginner who is looking to be more proactive in the market but yet cannot sit in front of the screen monitoring stocks all day.
Pros and Cons of Swing Trading
However, swing traders can also exploit market volatility and liquidity for their own gains. They are like day traders, only at a longer time horizon and they too find opportunities to open and close positions quickly.
There are a few differences between the two too. Swing traders usually have fewer positions that they hold, and thus also pay lower trading fees or transaction fees while the potential for profit and loss is much greater. They aren’t looking to make massive profits from a single trade.
Another advantage of Swing Trading is that it is more flexible than day trading. One needs to put in only an hour or two a day to monitor their open positions and check technical indicators.
What is Cons of Swing Trading?
Thus Swing Trading is a good option for many who want to make it a side hustle to grow their money. A salaried 9 to 5 individual can easily combine their jobs with trading at the side to generate cash flow. It also helps their trading psychology. If they know that they have a steady flow of income at the side, they will not be pressurised to make trades to earn money. They can trade with calmness.
Another advantage is that your capital is not tied up for long. Unlike what happens in long-term trading where it is difficult to exit a bad stock, here you can just take a small loss and move your funds to another trade.
Another benefit that Swing Trading offers is it helps you diversify assets. An additional plus is that it does not disturb your mental peace as much as day trading where you are required to make decisions in milliseconds. It takes away the pressure of time and lets you make calmer, more informed decisions.
Swing Trading has some disadvantages too. They have to pay overnight funding charges which day traders do not have to pay. Day trading in general is more profitable in the sense that the potential for profit is more. That does not necessarily imply that a day trader will make more money than a swing trader. It requires a completely different skillset – day traders need to be fast and sharp – they have to make decisions in seconds as to whether they should hold their position or exit if the market is moving against them.
Swing Trading in fact might see fewer profits, but it has the potential to see larger profits. They hold positions for much longer, and hence the chances of making a higher profit are higher.
We have discussed the return profile of Swing Trading. Let us look into the risks involved as well.
Swing Trading positions are exposed to overnight and weekend open positions so there may be price gaps, especially when there are earning reports or news after market hours. A trader’s stop loss is hence rendered useless.
It is also sometimes difficult to pick the right stocks. Usually, blue-chip stocks offer lesser opportunities because they are not that volatile (but some swing traders have a completely opposite point of view which is absolutely correct too!).
The opportunities are also limited compared to day trading – where there are multiple price movements in a day in multiple stocks – and in long term trading – where there is a larger time frame for the price to move so swing traders have to make the most of the limited opportunities in the medium time frame.
Sometimes it is better to play some stocks in the long term instead of exploiting just a single swing. Also, timing the market for a swing is not an easy job for advanced professionals, let alone beginners. Lastly, there are costs associated with Swing Trading which may be greater than long-term investing by a huge amount.
A final piece of advice? Always keep your investments and your trades separate. Knowing yourself is a key component to success in the stock market. One needs to have a correct evaluation of their own temperament, as well as risk-taking abilities. You also need to be aware of the resources that you can put in – both in terms of time and money. Then only can one decide if day trading is for them? Remember that all forms and strategies in the market have the potential to make money, so it really just boils down to execution.