Swing Trading

There are is a wide variety of techniques and strategies for investing and trading. The way to tell them apart is to examine the timeframe in which the trading takes place.

Strategies used by the active day trader and the long-term buy and hold investor differ dramatically. In between are a number of different stock trading strategies based upon timeframe.

Here is a look at each strategies advantages and disadvantages:


Day Trading: The stock or futures day trader is someone who is buying and selling intraday. They tend to do this with frequency throughout the day. A day trader may trade a few times per day or dozens of times per day.

Advantages: No overnight hold exposure. Can profit both long and short and take advantage of quick swings in both directions. Can focus on a higher winning percentage of trades by taking quicker profits and smaller risk.

Disadvantages: Work. Simply put, day trading requires the most effort. Your attention on the markets has to be consistent - not always constant but certainly quite active, at least during portions of the trading day. Trading costs are another consideration. You tend to run up a large commission bill when investing frequently.

Swing Trading: The swing trader could be a stock, option or futures investor. This person is looking to take larger bites out of the stock market that can stretch over a day or multiple days and weeks.

Advantages: Slower cycle of trades, meaning fewer trades to make, fewer commissions, less chance of error and the ability to catch the more significant multi-day profitable swing trades. Technical analysis is used primarily to identify these opportunities. Average profit target percentage is much higher typically than day trading.

Disadvantages: With those higher profit targets comes higher risk per trade. If you are looking to trade over a longer timeframe, you have to expect your average risk per trade will need to be higher simply to account for the retracements that are common in all stock and futures markets trading. There is also overnight exposure and you would be exposed to any major developments.

Long Term Swing Trading: The long term swing trader is someone who trades much like the swing trader discussed above, but he typically focuses on several weeks to months in average trading timeframe. Many times this type of investor is trading the indexes, timing mutual funds, or focusing on both technical and fundamental analysis.

Advantages: This trading strategy certainly filters out the 'noise' that is common in virtually all trading markets. What do we mean by this? It is easy to get faked out by small moves against the trend or your trade when day trading or even swing trading. The longer-term swing trader is less likely to get caught in these normal market wiggles. The profit objectives can be quite large. It is not uncommon to target 20%, 30%, 50% or more when trading out over a few weeks and months.

Disadvantages: Once again, the larger the timeframe usually the larger your initial risk, especially with stocks that are volatile. You must give those markets enough 'breathing room' to do their usual retracements but still stay with the trades. You'll also miss out on the numerous shorter-term swings that any market will make - even in a long sustained uptrend there tend to be quite a few solid shorting opportunities.

Buy and Hold Investing:

The usal scenario is an investor who has built a portfolio of stocks, bonds and mutual funds who looks to hold for the longest term.

Advantages: If you pick right using plenty of fundamental analysis and market sentiment analysis, the gains can be quite large with very few trading costs.

Disadvantages: Most buy and hold investors wouldn't know a protective stop if it slapped them in the face. What does that mean? It means that 98% of the buy and hold investors we've ever talked to have absolutely no plan for their investment. No idea of a profit objective and certainly no idea when to give up and move on. Why do you think so many lost 90% or more in the bear market? The buy and hold investors just couldn't bring themselves to sell. This is why we feel the buy and hold investor should re-classify himself as a long-term swing trader. You go from no strategy to a specific strategy where you always know when you enter a trade, what your objectives are, and how you'll exit should the markets go against you.

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