What is Swing Trading? Definition, Pros, Cons & More!
Swing trading is when investors capitalize on swings in the market by holding on to a security for an extended period of time. Day trading positions last for less than a day while swing trading can last up to a week. It is used to trade numerous securities such as forex, futures, options, and stocks.
Swing trading is beneficial as it provides more opportunities for profits than day trading and quicker rewards than long-term investments. But on the downside, you need to constantly manage trades as you might miss out on opportunities to make a profit if you don’t act quick.
So what exactly is swing trading?
In its simplest form, traders hold on to securities for an extended period of time to earn a profit. This can range from overnight to several weeks. The objective of swing trading is to identify a trend and find swings within that trend to make a profit. Technical analysis can be used to identify these swings and act on them. Both day trading and swing trading have higher risks and costs than typical investments.
Swing trading is often undertaken by individuals and not large institutions as large institutions trade in large volumes, making it harder to enter and exit the market as required. It is a great option for beginner traders as it allows them to gain experience in trading. Losses can be kept minimal with stop-loss techniques and it provides perspective on both short and long-term trading.
(Video Credit: Elearnmarkets)
Benefits of swing trading
Swing trading is beneficial to beginner investors and for those who need more time to make trading decisions. It comes with several advantages such as:
— Versatility- Swing trading is a good option for people who can’t trade during market hours but still want to remain active traders. You can decide the price at which you want to enter and exit the market and place stops so they the stock value doesn’t go below a certain level- there are some trading softwares that even let you place multiple stop-orders in a day. Additionally, swing trading can be used for numerous securities such as bitcoin and standard options.
— Identify opportunities- Swing trading is generally not adopted by large firms as the trader constantly enters and exits the market but this comes with its own benefits. It allows the investor to identify new opportunities in the market. Looking at a financial chart shows you the long-term trend of stock but this is not always protected by support and resistance. By entering and exiting the market on a regular basis, you can identify opportunities in different markets with new trades. This not only allows you to spread your risk but you also have a lot less capital tied up in a single stock.
— Lower losses- Stop losses result in lower losses than long-term trades. A stop loss on a swing trade maybe 100 pips for a 5-hour chart but a stop loss on a chart over a week can be 400 pips or higher. This allows you to take larger positions on long-term trends. You can also place multiple stop losses in a day to protect your stocks against loss.
— You can have a better understanding of the trades- Swing traders are technical traders and have certain signs and signals to show them when a stock is/will not perform well. Therefore this makes it easier for a swing trader to limit the damages before they occur. Long-term traders cannot do this as trade based on the fundamentals of the stock. A swing trader, on the other hand, needs to be patient and take fewer trades.
Disadvantages of a swing trading
Although swing trading has its benefits, it comes with its own trade-offs. Here are a few challenges of swing trading:
— Unpredictable changes- Swing trades can change dramatically overnight, so if the market changes while you are sleeping, you could be up for a surprise the next morning. In certain cases, even a stop loss won’t be able to protect your trade. Trading is risky in itself and entering and exiting the market means that you are risking the money more often. You are likely to face losses every now and then due to this.
— Expert knowledge- While this might not necessarily be a disadvantage, swing trading requires a trader to be knowledgeable in technical analysis. Looking at a chart to find the high and low points is easy but as a swing trader, you need to identify the entry and exit points as well. Learning these skills takes time and effort and a trader would need to master this before they start swing trading.
— Psychology- You need to have a different mindset when it comes to swing trading. You need to be able to think on your feet and be sure of the decisions you make. As a swing trader is more aggressive than a regular trader who only studies the charts. Swing trading does not provide you with the same leverage as day trading.
Bullish and bearish swing tactics
Stocks that are trending in the market rarely go in a straight line. A stock may go up for several days in a step formation and then gradually come back down. When the stock can be seen moving upward, it is said to be in an uptrend. Bullish traders look for the initial upward trend followed by the reversal of this, called the ‘counter-trend’. This is again followed by an upward trend. You should enter a trade only after the original upward trend has resumed.
Like upward trends, downward trends also move in a step pattern. A stock could trend downward for a number of days, followed by a few days of upward movement and then back to the downward trend. Traders should enter a bearish swing trade when the stock resumes its downward trend. They can do this with a sell-stop limit order.
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