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What Is Swing Trading?

Views 11222022.08.03

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Key takeaways

  • Swing trading is a trading strategy that aims to capture short or medium gains in a stock or other financial instrument.

  • Swing trading is designed to take advantage of the price fluctuations of security. Traders look to capture small moves within a larger overall trend.

  • Swing trading exposes traders to overnight and weekend risk when prices may gap and open the next trading day at a completely different price.

Understanding Swing Trading

Swing trading is a short- or medium-term trading strategy that takes advantage of price fluctuations to earn a profit.

The main goal of swing trading is to buy low and sell high. After monitoring price trends, traders will buy and hold onto an asset for a period of time (from a day to a few weeks) and try to sell it for a profit when the price increases. While some traders look for volatile stocks, others may prefer more stable stocks. In either case, swing trading is the process of determining where the price of an asset might go next, entering a position, and then taking most of the profit when that move materializes. 

Successful swing traders are only looking to focus on earning a profit from a short-term price move before moving on to the next opportunity. 

Advantages and disadvantages of swing trading

Advantages

  • Swing trading offers the greatest short- to medium-term profit potential as it takes advantage of market volatility.

  • Swing traders often rely exclusively on technical analysis, which requires less analysis than a day- or long-term trading and simplifies the trading process.

  • Swing trading is an effective strategy for rising, falling, and sideways moving markets — as long as the price movement is large enough to generate a useful swing.

Disadvantages

  • Some abrupt reversals in the market can cause a substantial loss because you don't trade the whole day.

  • Swing traders may miss long-term market trends in favor of short-term market moves.

  • Swing trading demands a lot from financial assets, markets, and traders. This strategy requires both liquidity of financial assets and volatility in the market to take advantage of a price swing. In addition, swing traders must have a solid understanding of technical analysis to use this technique effectively.

Swing trading vs. day trading

As two short-term trading strategies, the simple difference between them is holding time. Day trading holds are limited to one day, while swing traders may hold overnight to several weeks. Therefore, swing trading is exposed to the overnight risk that doesn't impact day trading. 

In addition, these strategies have different transaction costs. Day trading needs more frequent trading, which causes higher transaction costs.

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