What Is Swing Trading?

Swing trading, as the name implies, is a type of trading strategy that may be best suited for those who like to buy and sell stocks on a short-term basis. When an investor decides to use this technique, they will base their activities around trends and momentum shifts in the market. For example, if we look back at the S&P 500 over the last year, we can see that it has had some major swings up and also down.

By using this technique, an investor will try to “ride” market trends for quick profits. For example, let’s say that they believed in a short-term upward trend of the S&P 500 and bought the ETF (SPY) at $244. The investor would then sell their position when, hypothetically, the market increased to $252 for a total gain of $8 or 4%.

Now let’s look at swing trading from another perspective. In this situation, an investor believes in a short-term downward market movement and sells their stock at $51 for a total gain of $7 or 14%. They then buy back their position when the market moves to $49 for a loss of $2 or 4%.

It is important to note that, in both examples, the investor would have made more money than they would have if they bought and held through each trend. The difference, however, is the amount of time that they are willing to put into their investments.

Pros

  1. Quicker gains than buy and hold strategy
  2. Potential for larger returns than other investing strategies
  3. The opportunity for capitalizing on trends or momentum swings in the market

Cons

  1. More substantial losses than buy and hold strategy
  2. A higher risk for investors

As with any type of investment, it is important that investors do their research and weigh the pros and cons before they put money into a swing trading strategy. Whether you are looking to make a quick profit or find new trends in the market, swing trading may be your perfect fit.

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