Day traders are usually in and out of the stock market in one day. They usually hold a stock anywhere from a few seconds to no more than a day. On the other hand, trend traders may hold the stock for a few weeks or months by examining the long-term fundamental trends. Finally, hold investment strategies can hold a stock for months or years.
Swing traders fall between day traders and trend traders. The swing trading strategy is speculative. The trader holds a tradable asset in hopes to profit from price changes or “swings.” This “swing” can be a minimum of one day or last several weeks.
Traders use technical analysis, as opposed to fundamental analysis. Technical analysis is better suited for short term price patterns, whereas long-term investing has a heavier emphasis on fundamental analysis. Some swing traders may also use market sentiment analysis, which focuses on the feeling or tone of the market and advocates for not following the popular trends.
During the holding time, there can be numerous fluctuations in price, especially during shorter time periods. As a result, losses may be expected, and a swing trader must adapt this to his money management plan.
Profits are achieved by buying an asset or short selling a stock at the opportune time. Swing trading is all about capitalizing on sudden price spikes. By the end of the month, the stock price may be trending higher or lower, but it has fluctuated up and down several times to achieve that course.
Day Trading vs Swing Trading
Both day trading strategy and swing trading strategy seek to capitalize on short-term market fluctuations. Additionally, both trading systems may be simple enough for beginners to start with. However, the key difference between the two is the holding position time. Another strategy that may be leveraged could also be a Forex trading strategy, in which you buy a currency a certain price and upsell at a higher price in order to make a profit.
As the name suggests, day trading limits all trading activity to a single trading “day.” The United States equities markets officially operate from 9:30 am EST (Eastern Standard Time) to 4:00 pm EST every Monday through Friday. Day traders do not hold onto their assets overnight. Instead, they leverage the market swings and sell out their positions by the end of the same trading day.
While swing trading is still considered short-term trading, swing traders usually hold their assets at least overnight and often see their returns within a couple of days.
Swing trading costs less in commissions because swing traders hold onto their tradable assets for a longer period of time and make fewer trades. On the other hand, day traders may only hold onto their tradable stocks for a few seconds before cashing out. They have a larger frequency of trades, which results in more commissions.
Types of Stocks
In general, a day trader may look for low-priced stocks with large price fluctuations. On the other hand, because a swing trader’s goal is to hold the stock long enough to profit from a price swing, a swing trader may seek to buy stocks based on the company’s fundamentals and news with greater and longer-term effects on the sector.
Day traders typically have larger portfolio positions than swing traders do. It is normally easier to leverage larger shares of stocks when the trader is seeking to sell the positions hourly, as opposed to a few days to a few weeks.
Swing Trading Basics: Strategy Guide
Here is a basic strategy guide to swing trading for beginners.
What is a swing trading bullish pattern?
A “bullish” trend is an uptrend. When analyzing the big picture of a stock’s zig-zag pattern, if you see that the chart appears to be moving upward with some degree of predictability, you are observing a bullish trend.
How to Swing Trade on a Bullish Pattern
All stocks have price movements. After you identify the first upward movement as the significant part of a bullish swing, you will likely see a reversal, also known as the “countertrend.” Ideally, after the countertrend, you should see a continuation of the initial upward movement.
You should enter a bullish swing trade after the stock price has resumed its original uptrend. However, first, perform a risk analysis to determine your “entry point,” or where you enter the trade, and your “stop out point,” or where you exit the trade to limit your losses.
To perform a risk analysis, first, isolate the initial countertrend. If the stock trades higher than the countertrend’s previous day’s high, this entry point may be worth the risk. You may compare the countertrends of two more price points to assess the risk better and determine your upside entry point.
Your stop out point, also known as a stop loss point, should be the lowest point of the countertrend where you should exit the trade.
The highest point of the most recent bullish pattern should be your profit target. If your stock hits this target price, you should consider exiting the trade to lock in some gains.
What is a swing trading bearish pattern?
A bearish pattern is a downtrend that moves in a step-like or zig-zag pattern. A stock price may decline over the course of several days. During this time, it may recover part of the loss before turning south again. Over time, this downward bearish trend becomes easier to see.
How to Swing Trade on a Bearish Pattern
Bearish traders can use the same strategy for downtrends that bullish traders use for uptrends. For bearish patterns, the countertrend is when the stock price recovers some of its losses. As a bearish trader, you should seek to identify the initial downward movement as the major part of the bearish swing.
You should enter a bearish swing trade after the countertrend, and the stock price has resumed its original downward trajectory. However, first, determine your entry point, your stop loss point, and your profit target point.
On a bearish swing trade, the entry point may be determined by isolating the initial countertrend. If the stock trades lower than the countertrend’s previous day’s low, this is a possible entry point. Be sure to compare two more countertrends and price points to assess your risk.
Your stop loss point is the highest price of the countertrend. Finally, your profit target is the lowest price of the most recent bearish pattern.
Swing Trading Basic Benefits
Swing trading is a popular way to trade financial markets and has unique advantages.
1. Less Risk
One major appeal of swing trading is that the risk is lower than compared to trend trading or other long-term trades because of the closer stops and short-term nature.
2. More Profit Opportunities
With swing trading, there is greater profit opportunity per trade than compared to day trading, which results in quicker rewards.
3. Clear Boundaries
A swing trader is a more technical trader and can set clear limits to their profits and losses. Long-term traders need a broader view of the markets and have less distinctive boundaries for gains and losses.
Swing Trading Basic Risks
Swing trading comes with inherent risks and disadvantages.
1. Capital Gains
In a famous statistical study by Brad Barber and Terrance Odean, they found that active trading reduced the value of your capital by 30% when compared to the average long-term buy-and-hold investor. For example, they found that those who traded more often earned an annual return of 11.4%, whereas the average account made 16.4% annually.
2. Trading Commissions
Short-term swing trading means higher costs in trading commissions. This is expected because swing trading requires more transactions than a long-term buy-and-hold investment.
3. Tax Implications
When you hold your investments for more than a year, the gains or profits are subject to long-term capital gains taxes, which are more favorable than short-term trading gains.
Long-term gains are taxed at 0%, 15%, or 20% depending on your filing status and income.
Short-term swing trading gains are taxed at your ordinary income tax rate, which ranges from 10% to as high as 37% for 2019.
Consult a tax expert to see what applies to you.
Top 3 Tips for Swing Trading
Keep these tips in mind when you start swing trading.
1. Use a Reward-to-Risk Ratio
The difference between your profit target and the entry point is the approximate profit or reward from the trade. The difference between the entry point and the stop loss point is the relative risk.
Before entering a trade, be sure to calculate the reward-to-risk ratio. The minimum rate should be two-to-one. In other words, your potential profit should be at least twice as much as your possible loss.
If your potential reward is more than twice your potential loss than the trade is more reasonable and considered better. On the other hand, if your potential profit is less than twice your potential risk, the trade may be unfavorable.
2. Use a Simple Trading Plan
For a swing trading beginner, there are many strategies available. It is best to find a strategy that you feel comfortable with and understand thoroughly.
3. Do Your Research
The stock market does not exist in a vacuum. While charts play a vital role in swing trading and viewing price action, it is essential that swing traders are aware of government reports and company announcements. These can provide important predictors to market volatility.
Swing trading is a popular trading technique that even beginners can get involved with. Researching the stock market and keeping up with stock market news is essential to get started.
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