What is Swing Trading and is It Right For You?

It seems that share trading is becoming a new favourite activity among many. In an otherwise dismal year, newly minted traders are distracting themselves by chasing profits on the stock market.

While swing traders and day traders are both lured in by ‘ALL-IN!’ stock predictions and rags-to-riches (or just riches-to-riches) stories, the main difference between the two is time.

Day trading, as the name implies, involves buying and selling shares within the same trading day. It’s highly speculative and a quick way to lose money unless you’re an experienced expert.

Swing traders don’t trade within the same day, instead aiming to profit from slightly longer-term moves while still maintaining strict stop-loss and target levels. However, both terms are used interchangeably, and both strategies are often employed simultaneously.

Getting starting in swing-trading

Becoming a swing trader requires experience and knowledge of the market. To have any sort of success, you’ll need to create a system where you’re constantly keeping on top of the market and staying ahead of other traders.

To determine when to enter and exit the market, swing traders tend to use technical analysis, where they look closely at the pricing pattern of a particular stock to determine future pricing. Or, they might use fundamental analysis, which involves studying the state of the economy, industry conditions, as well as media and consumer perception of companies.

People who are new to this type of trading are lured in by early profits, but for every trading success story, there are thousands of others who walked away with less than they started with due to costs, interest and the mathematics of the market which are geared against you.

When you’re chasing profits based on short-term changes in share price, you’re a speculator, not an investor, even if the assets concerned are stocks in ubiquitous companies like Afterpay, or well-regarded ETFs.

I always advocate for long-term investing instead of trading, because patiently riding out the highs and lows of the stock market is much more likely to deliver a positive result. The odds of earning a good return are stacked in your favour as a long term investor, whereas you’re playing a loser’s game when trying to earn quick trading profits.

But if you still prefer to give trading a go, then here are some things to keep in mind.

1. Manage your risk: keep trades separate from your investments

It’s important to think of your trades as separate from your investments. Investments follow longer-term trends, and that’s why abrupt market reversals aren’t as painful to someone who’s in it for the long haul.

On the flip-side, swing trading is about short-term market moves, and, if you’ve bet your entire nest egg on a predicted swing that goes awry, you could suffer some serious financial and psychological pain.

As a rule of thumb, you should only risk 2% of your capital per trade, because that means you need to have 50 losing trades in a row to be out of the game. Successful trading is about having a consistent process rather than a few big wins.

All of your individual trades shouldn’t be the same big trade that will move in the same direction (i.e. shares in the same industry). Similar to long-term investing, diversification when you’re trading serves as an effective risk mitigation strategy.

2. You have to keep a constant eye on the market

Those who’ve spent a lot of time day-trading say that swing trading requires less of a time commitment because you don’t have to be constantly watching the market. In fact, swing trading may actually be riskier than day trading for some newcomers, because they might not be as vigilant as they should be.

The fact is, there are thousands, even millions of others, who are keeping an eagle eye on their stocks – whether they’re planning to sell that day or that month. You’re up against a ruthless bunch, so to stay competitive, you’ll need to allocate a significant amount of time to watching your portfolio.

3. You’ll need an ‘edge’

In order to be a successful trader (and not just a lucky one), you need to have an edge over other traders. You need to have some unique knowledge or insights that others in the market don’t have – otherwise known as ‘edge.’

Edge is what gives you a higher probability of a trade working. Your edge also needs to be publicly available information (unless you want to go to gaol). Having a unique, publicly available insight is rare these days since trading is so competitive and thousands of others are reading the same information as you.

The ideal insights are the ones no one else knows about – but…how are you going to find these out?

4. Forget yesterday’s news, it’s already in the price

For those traders using fundamental analysis, jumping onto yesterday’s news doesn’t provide any insight and can lose you money. In most cases, the information you read is already reflected in the share prices so there’s no point buying after the fact. More often than not it’s too late and others will be selling out.

Of course, that’s not the impression you’ll get from trading websites or newsletters promising a new formula for picking the right shares. Be wary!

5. Save the profits or invest the in lower-risk, long-term investments

The initial wins from some well-placed trades can be intoxicating, and you might want to keep increasing your trading position sizes after a few wins. If possible, resist the temptation, because luck has a way of running out.

New investors can get overconfident very quickly, suffering what’s known as the Dunning-Kruger effect, which is a cognitive bias that leads to people of low ability overestimating their own skill.

The best thing to do if you’ve been lucky enough to profit from swing trading is to save some of those profits or consider investing in a separate lower-risk diversified portfolio.

That way you’ll have something to fall back on if you decide that swing-trading is no longer for you.