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Swing Trading: A Profitable Alternative to Day Trading

If you were to listen to people talk about short term investing, you will most likely hear a discussion about day trading. These traders make a large volume of long and short transactions within a single market day and close out their positions by the end of the session. While this method of investing is very popular, there is also a high degree of risk and many people find that this methodology is not a comfortable fit for them. Swing trading provides a great alternative to day trading. A swing trader looks to capitalize on price moves in stocks that may occur over a period of time ranging from several days to multiple weeks. Unlike the day trader, you leave your position open overnight and at times on weekends, which can open you to increased risk. 

The Basics

In terms of a stock holding time frame, swing trading falls between day and trend strategies, where you may hold a position over several months. Basically, you are looking to capitalize on price moves within a stock and take a chunk of the anticipated price movement as profit. By evaluating and projecting the anticipated price movements of a stock, the investor can calculate risk/reward ratios and determine where they will enter the market and set their stop loss and take profit. Many using this methodology rely on technical analysis to guide their market moves because of the shorter-term nature of these activities.

Pros and Cons

As would be expected, each market strategy has its own set of pros and cons. Investors find that playing the market with swing strategies generally requires less time than the more intensive day trading. Short-term profit is enhanced because the stock buyer is focused on capturing a very significant portion of the market price movement. In addition, capitalizing on the market is simplified because it’s possible to learn and rely on detailed technical analysis to plot the price trends direction and level of movement. On the con side of things, risk exposure is increased because positions are vulnerable to market fluctuations overnight and on weekends. By focusing on shorter term trends this strategy may miss profitable longer-term trends. Sudden and unexpected market changes can result in significant losses.

Strategies for Investing in Bull and Bear Markets

Within a bull market, swing investors will look for stocks that have an initial upward movement followed by the typical reversal before advancing again. These stocks are said to be on the uptrend. From there you figure out your purchase price of a stock and chart out stop loss and profit levels. The stop loss issues a sell order if the stock reaches your preset low point and helps prevent significant financial declines. In bear markets, you reverse the bull strategy and you look for financial gains on the downside instead of looking to capture upside profits. By plotting the downward course of falling prices for a stock, and watching for rallies or trend reversals, you can determine when to enter the market and use sell-stop limit orders and in-the-money put options to limit your risk.