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Is Swing Trading More Profitable than Long-Term Trading?

Views 24KMar 22, 2024

You may have heard about swing trading if you are a new investor. For many investors, swing trading can be a high-profit opportunity. The key understanding lies in the importance of research and data monitoring. 

Here are a few things we will be covering in this article:

  • What is Swing Trade?

  • How Swing Trading Works

  • Popular Swing Trading Strategies

  • Swing Trading vs. Long-term Investment Profitability

Let's walk through the basics of the swing trade strategy, how to employ it, and a few tips to help you succeed. 

What is swing trade? Understanding the basics

Before we dive into how to swing trade and profitability, let’s break down what we mean by swing trade.

Swing trading is an investment strategy of buying and holding investments to gain profits from stock price moves. 

Traders hope to capture a part of any potential price movement or "swing" in the market. Their focus is on short-term trends that span a few days to weeks to help cut losses quickly and earn through upward and downswings.

In an uptrend, a trader would be looking to buy stocks in a long position, as it starts to rise then sell them when they reach peak before they decline again.

In a downtrend, some investors may want to short a stock as it begins to fall, as this strategy operates on short-term changes. It does not involve holding on to stocks for long periods and capturing long-term growth. For swing traders, what matters most is the swing highs go higher in a bullish market while swing lows go lower in a bearish market. Swing traders primarily use price charts and technical analysis to look for actionable trading opportunities.  Most of them use daily charts (60 minutes, 24 hours, or 48 hours) to choose the best entry or exit point.

How swing trading works

Now we can explore how an investor might get started with swing trading.

Being a swing trader, requires many skills, including the ability to evaluate potential stocks based on various factors and data, which includes:

  • The current economic condition

  • The forecast for the industry of the company you will invest in

  • Recent news that might impact the industry's success

  • Understanding chart patterns and data

It is helpful to take earning calendars into account. Earning calendar publications and releasing a company’s financial information can cause rapid price jumps.

Investors engaged in swing trading typically pay attention to the opening and closing stock prices. They also watch the after-hours trades to understand better the stock movement outside of the typical trading hours. The data collected can help investors identify potential buying opportunities.

Collecting your data

You can use the heat map to see which industries show signs of ‘heating up’ or ‘cooling down,’ which can tell you what areas may give you a good investment opportunity.

When you assess a particular stock, you can analyze the data deeper to see if this individual stock appears bullish or bearish.

The analysis can provide what stocks follow a pattern to help you decide where to invest with confidence.

Identifying your key points

To succeed in swing trading, you need to know how to identify three main data points that you will use to make your investment.    

1. Trade Entry point, the price and market conditions at which you will make your purchase.

2. Exit point - when you sell your stock and pocket your profit based on your swing trade strategy.

3. Stop loss. Stock loss offers protection that you will not lose more money if the market conditions change. You should know the point at which you will sell the stock, even before your exit point, because the risk associated has become too great.

Once you have chosen the stock, conducted the analysis, and identified these three main points, you can make your swing trade purchase. Once the new stock is purchased, it is advisable to keep an eye on the stock and track it until you reach your exit point or your stop loss. 

Popular Swing Trading Strategies

Click here to enter text. Swing trading comes down to improving your understanding of the data. You want to focus on building the quality and the quantity of the data you include in your analysis. Research is key to using swing trading successfully.

As a swing trader, you may find it helpful to make full use of the pre-and post-market trading hours for research purposes.

To understand how a stock may respond during the day, you can:

  • Research the daily news,

  • the opening market sentiment,

  • the opening and the closing prices for different stocks, and

  • monitor after-hours trading 

Investors can usually improve their swing trade strategy with this and regular market research.

For investors interested in swing trading, it can be helpful to consider some of the strategies used by those more experienced in the field. Here are two basic strategies that may help some investors find opportunities for swing investments.

Look at the average closing prices

Calculate the average closing prices over a specific period, such as ten or twenty days, to help you eliminate the extra ‘noise’ in the data and see the overall patterns within these periods. By charting these two averages on your stock chart, you can see when a stock is on an upswing or downward. If the line for the shorter time frame crosses the longer time frame line, the stock would be on an upswing. Those interested in investing in a rising stock may feel this is a potential entry point for their investment.

Fibonacci Retracement Levels

Another popular swing trade strategy is the Fibonacci retracement pattern. A Fibonacci sequence is a mathematical pattern in which the next number in a sequence is the sum of the previous two numbers. The Fibonacci retracement pattern looks at the percentage of which stock will rise and fall, and it then seeks to uncover patterns to find potential points that might reverse the stock.

Looking for these patterns can help investors set their entry points, exit points, and stop points with more confidence.

Swing Trading Pros and Cons

There are swing trade advantages and disadvantages. Here are some of the most common:

Pros of Swing Trading

The main benefit of swing trading for many investors is the minimal time commitments. Swing trading requires less time to trade than day trading. may take a few days or a few weeks to work out. You can potentially gain profits quickly because you do not spend more than a few days to a few weeks in one position. This also allows you to manage your capital more efficiently because your capital is not tied up for long. While the profits might be lower than a stock held for a longer period, your small wins can add up in a short period of time.

In swing trading, you only need a few minutes at the end of the day to do technical analysis, or during a trading set-up, you may want to evaluate the 4-hour timeframe to pick your entry price.

Another pro to swing trade is that if you find a trade that is not in your favor, you can cut your losses earlier and move your funds to another stock showing a trade setup.

When an investor is swing trading, they will need to rely on technical analysis to help determine entry(buy) and exit (sell) points. Attention to indicators such as the Fibonacci tool, lines, moving averages, etc., is needed to identify and predict changes and market trends. You must recognize the buying opportunity during an uptrend and downtrend and the price reversal as an investor.

If you have full-time employment, swing trade is a common choice for investors wanting to make a profit on the side without interfering with their current career. You can save time by setting alerts for your watch list and setting a stop loss and take-profit order for the positions you enter.

With proper risk management and strategy, swing trading can be profitable.

Swing Trading Cons

There are multiple benefits to swing trading, but it also has some drawbacks, as you will see below.

Since trades stay open overnight and often over the weekend, swing trades can be exposed to price gaps. When earnings reports or market news happens during after-hours, a trader can miss the opportunity to stop loss.

Because the goal of a swing trade is to profit from the price swings, you also can miss the opportunity to enter at the beginning of a new swing. Or worse, pull out when the swing is not in your favor.

Timing is everything, and timing the market can be difficult, even for advanced traders. If you do not have the experience or understand technical stock analysis, it may cost you time and profits. For some, it takes time to understand the concept of reading technical charts, indicators and how to use them wisely.

The overall cost to swing trade is lower than day trading but compared to long-term investments, it can add up simply because of the length of the trade. Swing trading often comes at higher commissions than overnight trades.

Swing trading has risks, especially if you do not have a predetermined stop-loss before initiating the trade.

Is swing trading more profitable than long-term investments?

Let’s explore whether a swing trade strategy is more profitable than traditional long-term trades.

This question can vary depending on an investor's investment goals and risk tolerance. In the short term, swing trade investors may see larger profits than those using long-term time frames. At the rapid rate, investors buy and sell their stock, swing trades generate profits quicker, and long-term investment professionals wait weeks or even months before the stock is sold and generate a profit.

The value of both investment types depends on the quality of research and knowing how a particular stock will likely begin to generate profit.

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