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Swing trading is a trading strategy that falls somewhere between day trading and long-term investments.
While a day trader closes all positions before the trading day is over, a swing trader will typically keep positions open much longer – sometimes for several weeks.
The aim of swing trading is to profit from swings in the market price.
Is swing trading risky?
Yes, just like with other forms of trading, you always risk losing the money your put at risk. Don´t risk money you can´t afford to lose. Exatly how risky swing trading is will depend on what types of financial instruments you swing trading. Swing trading on the forex market and swing trading on the stock market does not carry the same risk.
Compared to day trading, swing trading comes with an additional dimension of risk since you will keep one or more positions open over night instead of closing all before the end of the trading day. Although, it should also be mentioned that many traders find it easier to manage risk with swing trading, since there is no pressure to close all open positions before the trading day is over.
From a risk management perspective, a plus with swing trading is that you need to put less capital on the line since you have time to wait for more substantial price movements. A day trader will typically buy larger posts, because they need to profit from minute price movements. This also makes it more tempting for the day trader to utilize leverage or some other type of credit, which in turn is very risky since the trader may lose more money than they ever had in their account.
Example:
- The day trader closes the position after a tiny price change an makes a 1 cent profit per share. If the position was for 100 shares, that is only a $1 profit. To earn a $1,000 a much larger position would be required.
- The swing trader waits longer and closes the position after a much larger price change, making a $10 profit per share. If the position was 100 shares, the profit would be $1,000.
Of course, some day traders refuse to open huge positions, since that would go against their risk management style. They simply make more trades instead, to compensate for only earning a small amount on each individual trade.
Swing trading and taxes
It is very important to learn about applicable tax rules before you start swing trading, otherwise you risk being hit with some very unpleasant suprises. It is important to do things right to avoid getting into a situation where you are taxed on all profits but unable to deduct your losses and expenses. This is a genuine risk in some jurisdictions, but can usually be prevented by the knowledgeable trader. Don´t hesitate to contact the tax authorities for advice.
Is swing trading right for me?
Swing trading is not for everyone.
- Does having positions open make you nervous? If so, day trading might be a better choice for you, since you will close all positions before the trading day is over, giving you a chance to relax fully between your active trading days.
- Do you dislike the continous monitoring of the markets that comes with swing trading? Maybe long-term investments would suit you better. Buy assets with the intention of keeping them long-term, and stop fretting over short-term changes in market price.
