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You’ve heard of investing. And you may have heard of day trading. But are you familiar with swing trading?
Swing traders are people who buy and sell financial assets like stocks faster than long-term investors, but slower than day traders. They typically hold their positions for a period of several days to several weeks in an attempt to benefit from price “swings,” or interim highs and lows within a larger trend.
Here are more differences between swing trading, day trading and long-term investing and what you should consider before trying out swing trading.
Swing trading vs. day trading vs. long-term investing
As mentioned above, swing trading is a middle ground between day trading and long-term investing. But conceptually, it has more in common with day trading.
Day traders and swing traders both pursue short-term gains by using technical analysis. The biggest distinction between the two approaches is duration. Day trading, by definition, involves holding positions for less than a full trading day, and sometimes for as little as a few minutes. Swing trading typically involves a multi-day holding period, and sometimes takes place over multiple weeks.
The methodology of swing trading is also slightly different than that of day trading. Swing traders think about long-term trends when selecting positions, and then try to buy and sell at intermediate highs and lows within those trends. Day traders are largely unconcerned with the long-term and instead try to buy and sell based on small intraday market fluctuations.
Due to the difference in holding periods, swing traders typically make fewer trades than day traders, but pursue a higher profit from each trade.
Alternatively, long-term investors pursue gains over a period of years or even decades. They generally use fundamental analysis to estimate a company’s future growth, dividend-paying potential or rebound potential, and they buy and hold that company’s stock until they’re ready to sell.
Potential source of returns
Minutes or hours.
Intraday market fluctuations.
Days or weeks.
Minor highs and lows within a long-term trend.
Months or years.
Earnings growth, rebounding of an undervalued asset, or dividend income.
» Read more about the general differences between trading and investing
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Swing trading strategies
Swing traders often use statistical indicators like moving averages and support or resistance levels to determine when to buy or sell stocks.
Moving average crossings
A moving average is the mean price of a stock over a given period. A stock’s five-day moving average is its mean price over the last five days, and its 10-day moving average is its mean price over the last 10 days.
Moving averages can be plotted as lines on a stock chart, along with the price of a stock itself. Swing traders often interpret crossings between these lines as signals to buy or sell.
For example, if a swing trader is holding a stock whose price was previously above its five-day moving average line, and then the price line crosses under the moving average line, the swing trader might take that as a signal that the stock is losing momentum, and sell it.
Support and resistance level breakages
Sometimes, when a stock is rising, it repeatedly approaches a particular price level and then pulls back, as if it’s “struggling” to break through that price level. That “ceiling” on a stock’s price is known to traders as a resistance level.
On the other hand, sometimes stocks that are falling — or those that are bouncing up and down chaotically — fall to a particular price level repeatedly before recovering, as if that price level is acting as a floor. Traders call that "floor" a support level.
As with moving averages, swing traders often use crossings or “breaks” in support or resistance levels as sell or buy signals. For example, if a stock’s price was previously fluctuating below a particular resistance level, and then the price line rose above, or “broke,” that resistance level, a swing trader might interpret that as a signal to buy the stock.
» Learn more about statistical techniques for stock analysis.
Should you try swing trading?
If you’re thinking about trying out some swing trades, ask yourself some questions about your financial situation first.
Are you paying your bills? Saving money? Investing some of those savings in a mix of low-cost index funds to prepare for retirement and other financial goals?
Do you have money left over after all of the above — money you can afford to lose?
If your answer to all of these questions is “yes,” then feel free to swing trade to your heart’s content (with the money you can afford to lose).
But if you answered “no” to any of those questions, swing trading is probably not right for you right now. After all, most traders lose money in their first few months of trading, and many never turn a profit.