Swing trading is a type of stock trading that is not about day-to-day trades or investments. It’s between these two styles. Day trading will enter and exit positions in a single day. The investment will last for the long term (i.e. months and years).
Swing trading positions are typically held for a few days or weeks. The specific types of trading strategies or techniques can vary widely – some associate swing trading with taking advantage of price fluctuations, while others prefer momentum-up trends.
At its core, however, swing trading is more about the time a trade is held than a specific trading style. Let’s take a closer look at how swing trading works to decide if it’s a worthwhile strategy for making money in the stock market.
Swing Trading Vs. Day Trading
There are some key differences between swing trading and day trading. First, swing trading is much less demanding for your time. To be successful with day trading, traders typically need to set several hours per day, while swing traders may be able to manage their trades in as little as a few hours per week.
Day trading, on the other hand, offers higher potential returns over time. This is due to the simple fact that day traders enter and exit positions much faster.
For example, imagine a day trader enters every position with a profit target of 1.5% and sets a stop loss of 1%. When the day trader does eight trades a day and win half of them, you will deserve one daily return of 2%. This corresponds to a monthly return of around 40%.
Let us now assume that a swing trader sets a higher profit target of 3% (with the same stop loss of 1%) and also wins 50% of his trades. When the swing trader exits eight positions per month, You earn a monthly profit of 8%. That sure isn’t shabby. However, to get 40% per month, the swing trader would have to significantly increase the trading volume or set much higher profit targets per trade.
Finally, it should be noted that swing traders run the risk of a stock suffering a sharp fall overnight while the market is closed. Day traders don’t have to worry about this as all positions are opened and closed “intraday”.
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There is nothing specific to swing trading that helps traders spot opportunities. Traders can even use their existing swing trade identification methods.
Some traders use purely technical analysis while others focus on fundamental analysis. However, there is nothing wrong with using both as they complement each other.
For example, after examining a stock through fundamental analysis, nothing says that you cannot supplement that examination with identifying charting opportunities. Analyzing charts falls under technical analysis which uses support and resistance areas, moving averages, volumes, and more.
While basic research can tell you that a company is financially strong and has good prospects, technical analysis can tell you where some of the best trading entries are based on its stock price.
Choosing a financial instrument
Whether you are trading futures, options, stocks, or ETFs, they are all suitable for swing trading. For futures and options, you may need to roll positions to the next contract when your holding period expires. However, this does not preclude these instruments from being used in any way for swing trading.
If you come from day trading, there is a huge difference to be seen in swing trading. Since swing trades take place overnight, margin requirements will increase, especially for futures. You need to find out the margin requirement overnight and make sure you have enough cash in your account to cover it.
Long or short
Stocks can be bought long or short. Selling a stock short means opening a new position in the stock by selling it. This is a bet that the stock price will fall. Once the stock price reaches a certain level, you can buy it back to close the position.
Stocks must be available from your broker to borrow, as stock borrowing is required to sell short. Futures work a little differently when shorted out. There are no contracts to borrow for short futures. In a way, futures are easier to sell than stocks.
Shorting is a very risky trading method. If you short a stock at $ 100 and it keeps going up, your loss keeps going up. The bad thing is that a stock can continue to rise, resulting in an unlimited loss.
Of course, the short can be bought back at any time to close it. But the concept of an unlimited loss short is certainly real. This is not the case when you “walk long”. Since the value of a stock cannot go above zero, the maximum you can lose is the total amount invested in the long stock. But you can lose a lot more if you short a stock.
It is important to realize that swing trading is not an investment. Positions are held for a short time. Since the number of positions (and stocks) that can be opened depends on the account size of a trader, positions must be closed regularly so that the trader can take advantage of new opportunities.
Trades also don’t have that much time to recover from a loss. Before a trade is against you, the best thing to do is to figure out how much you want to lose so that you have a game plan. Remember with swing trading; There is only so much time to place a trade, whether it wins or loses.
When a trade is going in your favor it can be tempting to let it go. This means just holding the position open and watching the profit keep increasing every day. Of course, if it were that easy, everyone would.
But the market has a chance to mess up your plans if you stay in a trade for too long. The better way is to zoom out. This means entering into contracts gradually. In this way, you can capture part of your profits or reduce losses.
Swing trading doesn’t have to be exclusive to other trading styles. If you are an investor, you can keep investing. If you are a day trader, you can continue the day trader.
As the market becomes more volatile, investors may find better opportunities through swing trading. For day traders who are constantly on the lookout for trades, they can regularly identify trades that are more ideal for multi-day trading.
The styles, techniques, and strategies available to traders and investors are enormous. Swing trading is just another tool to slip into your trader / investor tool bag and use when needed.