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Swing trading is a popular style of trading, and it is often the recommended trading style for beginner traders. As with any other type of trading, it offers many benefits but also has some demerits. But what are those pros and cons of this trading style?
The main benefits of swing trading include minimal time commitment, the flexibility of capital management, the ability to combine it with a full-time job, and many more. But there are demerits as well, which include overnight price gaps, missing exceptional stocks, and market timing.
In this post, we will explore the pros and cons of swing trading, but we have to first understand what swing trading is about.
What Swing Trading is About
Swing trading is a kind of trading style that sets out to profit from the medium-term price swings rather than the intraday price moves or the long-term trend. As you already know, the price moves in waves, with up and down swings, irrespective of the overall direction of the trend — upwards, downwards, or sideways. With swing trading, you aim to trade those up and down price swings but on the daily timeframe. The swings on the daily timeframe tend to last from a few days to a few weeks, and on some occasions, they can last up to several weeks.
The essence of swing trading is to profit from individual price swings, one swing at a time, rather than riding the long-term trend with multiple impulse and pullback swings. While it is possible to trade both the up and down price swings, especially in a ranging market, it is better to keep to only buying into the upswings because the price of a stock has limited downward potential but unlimited upward potential.
Swing traders mostly base their trading decisions on technical analysis, with little or no input from fundamental analysis. They often use chart analysis to predict where one swing might end and start the opposite swing, so they try to enter at the beginning of a new swing and hop out before the opposite swing begins.
How Does Swing Trading Work?
It is universally known that the price of financial assets moves in waves, with upward and downward swings. Swing trading seeks to capture these price swings by entering a trade at the start of the swing and exiting the trade before the swing ends, reverses and begins a new swing in the opposite direction. These swings are best captured on the daily time frame.
From the foregoing, it’s pretty clear that the swing trader’s principal challenge lies in being able to identify both the beginning and the end of a swing to correctly time the entry and exit of their trades. It follows then that swing trading relies heavily on technical analysis to correctly identify these starts and finishes of price swings to provide actionable intelligence for the swing trader. Enter into a swing too late and you’ll quickly see yourself stopped out whereas, if you leave too early, you’ll be missing out on the rewards of your accurate prediction; so getting these two aspects right really will make-or-break your trade. This is done through chart analysis of price patterns, allowing you to measure when you should enter into and when your should leave any given swing to reliably profit from the movement.
What are the Advantages of Swing Trading?
There are several reasons why swing trading has been so widely embraced by many astute and experienced traders.
- Good Returns:
Since trades are held for a reasonable length of time, this allows market trends to fully evolve and mature, thereby yielding bigger and better returns per trade when compared to day trading. Annual returns vary but profit ratios anywhere between 10% and 50% are not uncommon.
- Reasonable Initial Financial Layout:
Your initial financial outlay for this type of trading is not excessive. A starting balance of anything from £2000 to £5000 may be required by some brokers to open a swing trading account.
- Less Time Spent In Front Of The Screen:
Owing to the fact that swing trading is done mainly off a daily chart, the swing trader only needs to look at the charts at the end of the trading day, in the evening actually, when the daily candle has closed and confirmed. Accordingly, they require little maintenance. You don’t have to get up early for the market’s open, you can enjoy a lie-in and leisurely start your day. Fifteen to thirty minutes at the end of the trading day is usually all that a swing trader needs to review the day’s trading activity and make any required modifications to existing open positions.
- You Can Easily Swing Trade Whilst Working A Day Job:
Since swing trades require such little ongoing maintenance, they are ideal for people who have full-time jobs but want to trade on the side for an additional income stream. Continuing to have an income generated by your day job means that you’re not going to be under pressure to take unnecessary risks. Swing trading is the ideal side-hustle for anyone looking to trade part-time or when they are still learning and transitioning to trade as their principal income.
- A Dream For Stay-At-Home Mums & Dads:
Let’s face it, raising a family is no mean feat. Looking after the kids, carefully coordinating school runs – you name it. Parenting is a full-time job and then some! The good news is that swing trading, as an evening activity, will only take up 15-30 minutes of your time after you’ve put the kids to bed. How’s that for flexible working? I love being the bearer of glad tidings!
- Time For Your Hobbies:
You might be looking at trading to form a supplementary income to your retirement. Who can blame you with interest rates being as low as they are. However, not all lows are bad. The low maintenance nature of swing trading and the minimal time spent in front of your computer screens means that you can get on with enjoying the things that interest you. There’s time in the day to pursue hubbies and, after half an hour’s work, time to enjoy the evening as well (for you night owls).
What are the Drawbacks of Swing Trading?
Alas, every rose has its thorn. Whilst there’s certainly a lot of Pros to this style of trading, it is not without its disadvantages.
- Overnight Risks:
Since your trades are held for more than one day, they are (naturally) subject to overnight price swings due to trading activities in different time zones so this needs to be factored in and monitored.
- Overnight Price Gaps:
For the same reasons cited above, price gaps commonly occur when a security’s opening price is significantly different from its last closing price thereby leaving a price gap when the next day’s price candle opens.
Since the typical swing trade has a larger stop loss value compared to the average day trade, a losing trade could lead to a small (but still noticeable) deficit in your trading bank. However, proper risk management and correct position sizing will mitigate this risk.
Patience is a virtue has never been truer than when it comes to swing trading. Quite a bit of patience is required to hold trades for a long enough time to allow the market’s swings to run uninterrupted and come to their logical end.
A swing trader needs to be disciplined enough to resist the urge to tamper with the parameters of an open trade for as long as the swing remains viable. It takes a lot of discipline to control the emotions associated with trading. You need to stay focused, trust the strategy and not exit the trade prematurely or tinker around with it too much. These types of trades require little maintenance or interference, which can be tricky for certain personality types. With swing trading less is most definitely more.
The Reasons Why You Should Become a Swing Trader
As I’ve written about at length in other articles; when you trade the daily chart time frame as a swing trader does, you are reaping many benefits compared to those poor souls who still believe scalping a 5-minute chart is the key to success.
One of the reasons why swing trading is such a huge advantage to the retail trader, is that it allows you to skip all the market ‘noise’ of short time frames, like those under the 1-hour chart. Brokers and the big institutional traders WANT smaller retail traders to trade short time frames and day-trade / scalp, because they know they will get your money easily if you do.
Swing trading on higher time frames like the 4 hour and daily allows you to piggy back off the big moves created by the bigger players in the market, and it also allows you to place your stop loss outside of their reach, thus giving you greater ‘staying power’ so that you can stay in the market longer and increase your chances of getting aboard a big, profitable move.
Fit trading in around your schedule
Swing trading allows you to fit trading in around whatever busy schedule you may have, or if you don’t have a busy schedule it will allow you to make money trading and still enjoy your free time. There’s nothing more boring than having to sit in front of the charts all day, not to mention that it’s bad for your trading and your health.
Swing trading allows you to analyze the markets on your schedule, for short periods of time, because you are focusing on higher time frames as mentioned above. Also, because you are holding your trades for a day or more in most cases, you can enter a trade on a Tuesday let’s say, then go to sleep and wake up a day later and check on your trade. You do not need to sit there all night worrying about your trades, nor should you. An almost ‘magical’ thing happens when you stop paying so much attention to your trades; you start to see better trading results.
People over-complicate their trading by simply being too involved. Swing trading is the best method because it’s complementary to how you should behave in the market because it rewards you for being less involved and taking less trades over time, which is exactly what you need to do if you want to have any chance at success. The take home message here is, swing trading will help you avoid over-trading, and over-trading is the biggest reason why people lose their money trading.
Why Is Swing Trade Better?
Swing trading is the best deal for beginner traders. It requires less skill and expertise. Additionally, if you are not a full-time trader, your next best option is swing trading, which doesn’t demand you to stay glued to the computer screen all day.
Thirdly, it is the only game for retail traders. Remember, when you are a trader, you are working alone, and there could be numerous market conditions working against you. Unless you have a sizeable corpus available and the ability to digest bigger risks, day trading can be difficult. In day trading, you have to react especially fast, and unless you have a great deal of experience and knowledge about the market, it can be difficult. On the contrary, swing trading allows you to judge the market and analyze trading opportunities before execution.