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Markets move in waves known as swings in the price of the instrument. No market will trend up without having some sort of retrace in price. The best swing trading techniques will attempt to ride either the swing up in price or the swing down in price. If you are trading against the main direction of the price trend, this is known as counter-trend trading. Some swing trading strategies will have both a trend and counter-trend trading component.
Many of the best swing trade techniques will have you holding a position from a day to several weeks. You are not looking for a small price increase/decrease but are looking to take advantage of the bigger price moves that most instruments make. Many times, swing trading strategies take place on the higher time frames which will reduce the amount of “price noise” that usually accompanies the faster time frames. The higher time frame charts will generally have support and resistance areas further apart which many people use to base their trading decisions on.
Financial markets never go in one direction forever, and by being able to take advantage of that, you can increase your returns as you in theory are going to be making money when the market rises over the next few days, and then make some when the market pulls back, as it will certainly do sooner or later. By being in and out of the market in a matter of a few days, (typically) you can collect profits, and identify other markets that are setting up for other trades. This allows you to spread the risk around, and ties up a lot less capital instead of constantly having to come up with margin for new positions as you find new trades.
Getting caught in a congested market with violent swings in each direction can stop you out repeatedly causing you many losses. This is where proper risk measures come into play. Your protective stop orders are generally bigger in size which, if you do not adhere to proper risk profiles, can have you lose a great portion of your trading account when the losses come. The ease of swing trading can have traders involved in too many markets at the same time. This can be a disadvantage and put too much capital at risk in the markets if/when your swing trading strategy delivers a losing streak.
What Is Swing Trading
Swing Trading is a style or way of operating in the financial markets, over the short or medium term, whether in Forex, Cryptocurrencies, Indices, or other markets. This method aims to take advantage of the movements or changes that the price has over time to detect opportunities between these movements, over a time period of days or even weeks. Trades are based on two types of swing: swing lows and swing highs.
Swing trading is the term used in the context of trading in financial markets, in case of swing trading an individual take a long or short position depending on his opinion about a stock or index and this position is kept open for many days or weeks so as to profit from index or stock moving in anticipated direction of an individual. In order to understand this term better one should look at the advantages and disadvantages of swing trading
The Cons Of Swing Trading
Despite the many benefits associated with swing trading, it has some demerits, which we will discuss now.
1. There is exposure to overnight and weekend price gaps
In swing trading, trades stay open overnight, and in some cases, over the weekend. So, they are exposed to overnight or weekend price gaps, which can happen when there are earnings reports or other market news during the after-hours market or over the weekend. The problem with these gaps is that they render a trader’s stop loss useless. The only way to minimize the risks associated with price gaps is to trade smaller trade sizes without leverage.
2. There is the possibility of missing exceptional stocks
Swing trading aims to profit from individual price swings. You try to enter at the beginning of a new swing and get out when a pullback starts. But in doing so, you may miss out on a great stock that would have made more money if held as a long-term investment. Examples of such stocks include Amazon, Apple, and Tesla.
3. Market timing is difficult
Even legendary swing traders know that timing the market swings is very difficult. If it is difficult for the experienced traders, how will it be for the beginner traders?
4. The trading cost can easily add up
While swing trading incurs less cost compared to day trading, the cost can easily add up to a huge amount, especially when compared to long-term investing where one trade can last for many months or years.
The Pros Of Swing Trading
There are certain advantages that swing trading offers. Here, we will try to discuss some of the most common ones:
1. The time commitment is not much
While swing trading will keep you busier than long-term investing, compared to day trading, swing trading requires less time commitment. In swing trading, you do your technical analysis on mostly the daily timeframe, except when a trading setup is forming and you want to step down to the 4-hourly timeframe to pick a better entry price.
So, unlike in day trading where you get to watch your price chart all the long to analyze those data that are printed every 15 minutes or 30 minutes, depending on your timeframe, you spend only a few minutes at the end of the trading day for your analysis.
2. You can trade part-time
Owing to the nature of swing trading and the fact that it doesn’t take much time, you can combine it with a 9-5 job or any business that can generate constant cash flow for you.
The good thing is that the cash flow will help your trading psychology in no small measure. When you know that your basic needs are taken care of and you can pay your bills, you can trade with much calmness, without being in a haste to make money.
3. Swing trading can be very profitable
With a good strategy and proper risk management, swing trading can be very profitable without any stress. If you consistently implement your strategy, you can expect to make reasonably good returns from swing trading.
On average, you can make between 10-50% per annum from swing trading, which is better than the broad market return per annum. But you must have the mental skills to stay consistent.
4. It does not tie down your capital for long
With swing trading, you don’t get to have your capital tied down in a bad stock for a long time, unlike what happens in long-term trading. If a trade is not working fine, you take a small loss and move the funds to another stock that shows a trade setup.
In other words, swing trading gives you greater flexibility with managing your funds so that, at every point in time, your funds are working hard to make money for you.
The Swing Trading Pros and Cons – Does One Outweigh The Other?
Now that you know the individual pros and cons of swing trading, it’s time to ask the question everyone wants to know: does one side outweigh the other? In our opinion, the pros far outweigh the cons. That’s because many of the cons can be alleviated through proper education and the help of tools & software.
But the reality is that only you can determine whether or not you should become a swing trader. After all, it is your money being invested. Do what feels right for you. But with that said, here is our final verdict on the matter: the pros outweigh the cons.
Swing trading is one of the most simple, profitable styles of investing. And it doesn’t take much time. Sure – you take on some risk during after-hours, and you may lose out on long-term profits. And technical analysis is complicated and boring. But allow us to offer a bit of resistance to these supposed “drawbacks” below:
Every investment strategy comes with its own risks. When you consider the risks of swing trading, they are very minor – especially when you have the help of stock forecasting software (more on this in a moment). And while you may lose out on huge long-term profits, you more than makeup for it through the volume of trades you execute along the way. And, if you hate technical analysis – just know that you can eliminate it altogether with the right software.
Eliminate Many Of The Swing Trading Cons With The Right Tools
Want to eliminate the risk, uncertainty, emotion, and human error associated with swing trading? Want to execute trades on autopilot without wasting your time filtering through charts and conducting technical analysis? And all the while, securing impressive profits and winning trades? If all of this sounds good to you, then consider getting started with a stock forecasting software like VectorVest.
VectorVest is the most sophisticated, intuitive system in the investment world. We use proven mathematical models to time the market to a high degree of accuracy. In fact, we’ve been one step ahead of every major market move for the past 20 years. Based on a proprietary system that simplifies all technical indicators, we present you with a clear buy, sell, or hold recommendation for any given stock. Want to see how easy and simple we make investing? Try it out yourself with a free stock analysis today.
In the VectorVest dashboard, you can easily identify opportunities by pulling up our searches and taking a look at our recommendations. You’ll find Hot Stocks, Retirement Stocks, Hot Industries, and much, much more. Or, build out your own custom watchlists. The beauty in our platform is that you can still conduct technical analysis, use indicators, and invest the old-fashioned way if that’s your thing. With VectorVest, investing can be as simple or complex as you like.
Important Factors To Note About Swing Trading
Mentioned here are a few of the important factors that investors should know before investing through swing trading:
- Relies more on technical analysis :Since swing trading involves a technical analysis of stocks, it may require investors to spend substantial time in designing the technical charts and indicators when starting off. Only when these are used effectively will a trader be able to generate profits over time.
- Higher risk involved : Despite the knowledge element required in swing trading, there are often higher risks involved. Even if one uses the best of techniques, stock markets are unpredictable and may result in losses at times. Using stop-loss concept in swing trading can help in limiting the losses due to movements within a short span.
- May not be suitable for beginner investors : This concept may not be suitable for new investors who may be starting off with basics of stock markets. It is best to have sufficient knowledge of the markets and trading before venturing into swing trading.
Swing Trading Risks
Swing trading is risky and demands a great deal of time. As a swing trader, you must monitor the market during every trading hour. You also must be able to control your emotions so you stay focused and trade within your plan.
Ask any swing trader; you’re likely to hear that strict adherence to money management reduces risk. The counterargument is that swing trading exposes a great deal of capital to risk but makes only small profits. Some traders are able to swing trade profitably, but you need to realize that the odds are stacked against you. Only you can decide whether it’s worth the effort.
Some argue that swing trading combines the worst aspects of position trading with the worst aspects of day trading. Like day trading’s, swing-trading profits are small and slippage costs are high.
Swing-trading positions are held overnight, so swing traders can’t take advantage of the special margin provisions that are available to day traders who close all positions by the end of the trading day. And swing traders are subject to the same account restrictions as day traders are, but they may not qualify for the special tax advantages afforded to full-time day traders.
Special tax treatment is available from the IRS for full-time traders. The benefits enable full-time traders to be taxed as a business rather than an investor, and that means you can deduct the cost of the computer hardware and software used for trading, and you can treat your home-office expenses, including the costs for data acquisition, as ordinary business expenses.
Furthermore, you can convert capital gains and losses to ordinary gains and losses under the Mark-to-Market accounting rules in the IRS Code Section 475. Mark-to-Market rules enable you to avoid wash-sale regulations and deduct all losses against other income, without hitting the $3,000 cap imposed on other investors.
You must report gains and losses on IRS Schedule D, and you must adhere to wash-sale regulations. You may also run into difficulty if you try to report your trading expenses as a business deduction.
The rules are complex. You need to consult with your tax advisor to determine your eligibility.
Pattern-day-trading rules apply
If a swing trader opens and closes a position in a single stock during one day and does this more than four times in a five-day period, the swing trader is categorized as a pattern day trader. If this occurs, the swing trader must maintain an equity balance of $25,000 in his account or his broker will prohibit him from making any day trades.
This scenario actually is quite likely for the swing trader, because of the number of stops that are hit. As a swing trader, you may as well plan to maintain a minimum equity balance in your trading account in excess of $25,000.