Swing trading is a trading technique that predominantly uses technical analysis to find opportunities, though some fundamental analysis can be used to supplement it. Swing traders essentially look for short term gains over a period of days, and at the very most, a few months.
As we’re all aware, market prices never move in a linear fashion. Thus, these minor oscillations are seen as trading opportunities to swing traders. The main thrust is to find the points where the market changes direction and riding those swings briefly. In other words, it’s about finding the short-term legs of longer-term trends.
This is the stand-out difference between swing trading and day trading — that day trading conversely opens and closes multiple positions on a given day. It’s not that anyone trading strategy is the best, but they do tend to benefit certain personalities at certain times better.
Why swing trading may be preferable to day trading
Generally, it’s considered that day trading has more profit potential than swing trading, but it also has more loss potential. Because there is a much higher frequency of trades, the cap on both ends is vast for the strategy overall. Compare this to swing trading, which may only make 6 trades per month as opposed to 6 per day, then you’re exposed less to high losses.
Of course, when the market is steady and you have an appetite for risk (or if you want trading to be your fulltime income), then day trading seems like your best option of the two. But in the current turbulent times of unique circumstances, fewer trades with longer positions may be the right strategy here to offset those brief volatile price changes.
A hugely beneficial reason to swing trade instead of day trade during these difficult times is that you’re less likely to get burnt out. Instead of making numerous difficult calls per day in a market that at times fails to make sense, you’re taking more care with fewer trades.
Lastly, on a more general note, swing trading has become more accessible to the everyday person. It really only requires the conventional trading tools and an internet connection. Compare this to day trading, where you need expensive trading software to ensure trades are done precisely, as well as state-of-the-art stable internet. There’s just simply less time pressure and urgency with swing trading, making it slightly more laid back.
Why Swing trading is smart in turbulent times
Forgetting the comparison with day trading for a minute, we must remember that swing trading still allows you to be in and out quickly. Compare this to buy-and-hold strategies, or large ETF lump sum investments, then you’re able to pick more opportunities with Swing trading. More importantly, you’re not staying in the market for too long, which is the right choice when a recession and crash is expected by many experts.
This strategy therefore performs quite well regarding diversification, and ties up less capital instead of having to come up with margin for new positions, as trades are done sequentially so the next one can be funded.
Swing trading is quite a technical based trading. This allows you to have clear boundaries and a clear plan. This allows traders to know exactly when a trade isn’t working, and in these times of high volatility, it can prevent large losses.
The risks of swing trading
The biggest downside of swing trading is that, even given a decent percentage of trades won and the average win being twice that of the average loss, it’s still difficult to make a full-time living from swing trading alone. This is, like stated above, down to the fact there are few trades taking place.
Trades under a swing trading strategy take quite a bit of time to scope out. Once a trade is active, you can set a stop loss to limit risk. Whilst this prevents huge losses on a single trade (and stop losses usually are smaller than on long-term trades), you’re now more likely to be stopped out at an unfavourable price.
Whilst day trading may leave you open to higher losses, this is overall. Swing trading, by nature of taking longer to close, leaves you more at risk of larger losses in a single position.
Overall, swing trading is a decent strategy in the current climate, but it may not be the easiest. Even if you are well-versed in technical analysis (and you will need to be), you also get whipsawed quite often with swing trading as the market often doesn’t respect the support or resistance that appeared to show.
Investing in the market instead is certainly safer, but it really depends on your strategy, goals and time-frame. Mutual funds and index trackers are decades-long strategies, for example. Swing trading instead can be a nice way to make some side-income, and the stop-losses make it easy to pull out.