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Examining the Profitability of Swing Trading

C hoosing a trading style is one of the first steps when deciding to trade for a living. Swing trading is a common strategy used by regular or full-time traders. This trading style is a short-term method used to trade stocks and options and is based on identifying trends and making gains from these trends. Swing trading has the potential for significant annual profits when done correctly. Explore what swing trading is, if swing trading is profitable, the difference between swing trading and day trading, and how to swing trade for a living.

Swing trading can certainly be profitable, but several factors influence how much money you can make using this trading strategy, including:

  • How much money you begin trading with: As a general rule, the more money you’re able to trade with will directly impact how much you stand to profit. For example, someone who begins trading with $1,000 will likely profit less than someone who begins trading with $20,000.
  • How much time you contribute to your trading efforts and education: As with other types of trading, swing trading is a skill, and traders must take time to learn how to trade in this manner effectively. The more time you spend educating yourself and becoming familiar with this strategy, the more successful you’ll likely be.
  • Your ability to choose the right stocks: A trader’s success using the swing-trading method is largely dependent on their ability to choose the right stocks. Large-cap stocks tend to be the most profitable for short-term holds like those seen in swing trading.

What Is Swing Trading?

Image via Unsplash by Chris Liverani

Swing trading is a method of short-term trading that uses technical analysis to identify stocks showing short-term momentum. With this method, traders look at the fundamental value of stocks in addition to patterns and price trends and use this information to make trades and gain returns. Most positions are held for longer than a day in swing trading, setting it apart from day trading. Many fundamental traders use this method since organizational fundamentals can take several days or weeks to show sufficient price movement to deliver a profit.

Swing traders typically hold a stock for a short period, usually a few days or weeks. They trade the stock based on its intra-week or intra-month changes. Tactics used in swing trading include technical analysis, mean-reversion techniques, trend-watching, and time-frame charts.

Is Swing Trading Profitable?

Swing trading can certainly be profitable, but several factors influence how much money you can make using this strategy, such as:

  • How much money you begin trading with: As a general rule, the more money you’re able to trade with will directly impact how much you stand to profit. For example, someone who begins trading with $1,000 will likely profit less than someone who begins trading with $20,000.
  • How much time you contribute to your trading efforts and education: As with other types of trading, swing trading is a skill and traders must take time to learn how to effectively trade in this manner. The more time you spend educating yourself and becoming familiar with this strategy, the more successful you’ll likely be.
  • Your ability to choose the right stocks: A trader’s success using the swing-trading method is largely dependent on their ability to choose the right stocks. Large-cap stocks tend to be the most profitable for short-term holds like those seen in swing trading.

At the end of the day, the amount of time and money you put into your swing trading efforts will ultimately dictate how profitable you are using this trading strategy.

Swing Trading vs. Day Trading

D ay trading and swing trading are both highly popular trading methods used by regular and full-time traders. While one style of trading isn’t necessarily better than the other, it’s essential to understand the differences to determine the best strategy for you. Here are the most prevalent differences between swing trading and day trading:

  • Time frame: Day traders typically open and close several positions in a single day. Because of this, day trading focuses on single-day trends and calls for quick decision making that doesn’t take into account potential changes after the market closes for that day. On the other hand, swing trading involves holding positions at least overnight, with many swing traders holding positions for several days or weeks.
  • Potential returns: Day trading often yields rapid returns when done correctly. For example, if a day trader risks half of their capital on a trade and wins, they’ll make a return of 100%. Swing trading can still offer substantial returns but at a slower rate due to the length of time that they need to hold the position.
  • Minimum capital requirements: [BUBBLE QUOTE]Day trading and swing trading have different minimum capital requirements depending on the market the trader trades in. For stocks in the U.S., day traders must have an account balance of $25,000 or more. There are no minimum requirements for swing trading U.S. stocks. When swing trading the forex market, a minimum of $1,500 is recommended, while when day trading the forex market, it’s recommended to have at least $500 in your trading account. For trading futures, day traders should start with between $5,000 and $7,500, while swing traders will need at least $10,000.
  • Time spent trading: Day trading typically requires much more time spent trading when compared to swing trading. Most day traders trade for a living, while swing traders can participate in this trading strategy in as little as 45 minutes a day.

How to Swing Trade For a Living

If you want to make swing trading your primary source of income, you’ll need to spend ample time learning the ins and outs of this strategy and how to best use it to gain profits. Here are a few steps you can take to hone your swing-trading skills and increase your swing-trading returns:

1. Get Familiar With the Different Swing-Trading Indicators

There are a few indicators that are especially important in swing trading, including:

  • Moving averages: There are two types of moving averages: simple and exponential moving averages. Simple moving averages are based on the average of all the closing prices during a set period of time. Exponential moving averages take into account recent data and allow the moving average to adjust more quickly to changes in the price.
  • Volume: A rising volume indicates more money in the security, while a decreasing volume or no volume could mean the stock is being undersold or oversold.
  • Relative strength index: RSI measures the strength or weakness of a particular stock based on a scale from zero to 100. Traders use RSI to determine if a stock is oversold or undersold. This strategy is one of the best for swing trading and will give you the information needed to decide when to enter the market.
  • Visual analysis indicator: Pair technical indicators, like the RSI, with visual market patterns to make more informed decisions when swing trading.

2. Create a Trading Routine

Like other jobs, swing trading requires a solid routine to be successful. Many swing traders start their days before the market opens to get a feel for the day’s market and to create a daily watch list. Then, the swing trader watches and enters trades throughout the day based on trading activity. Once the market has closed, a trader reviews their open positions and looks for after-hours earnings announcements.

3. Limit Your Losses

As with other types of trading, limiting your losses is crucial to be a successful swing trader. The sooner you can cut your losses and move on to the next trade, the better.

4. Know How to Choose the Right Stocks

Swing trading requires you to know how to choose the right stocks. [BUBBLE QUOTE] Generally, large-cap stocks are ideal for swing trading and offer high dividends, stability, and transparency. In active markets, large-cap stocks swing between high highs and low lows, so traders can ride these swings and make trades when the stock changes direction.

5. Keep Your Risk Low

Successful swing traders focus on smaller yet more reliable returns, which ensures they don’t risk more than they can afford and have a steady stream of income. Many traders keep their risk to 1% or less per trade to limit their overall loss and keep funds available for better opportunities.

6. Stick to Your Plan

Successful swing traders not only have a solid trading plan in place, but they stick to this plan no matter what. This requires discipline and can sometimes be difficult to uphold when emotions run high. However, sticking to your plan ensures you don’t risk more than you can afford and can get out of trades when necessary.

Your success as a swing trader can drastically increase with adequate practice, time, and a commitment to limiting your losses and upholding your trading plan.