Many of us want to own our own business or be our own boss one day. You may have even dreamed of being as successful as Warren Buffett. Swing trading is a trading strategy that has been used for years successfully, and if you learn the tricks of the trade, you, too, can have a piece of the pie. Now before you pay a so-called financial guru $2,000 a year for a list of which stocks to swing trade, learn the basics.
Keep reading to learn what swing trading is, the pros and cons of this method, tips for success and more. By the end of this article, you will have a good idea of whether swing trades are right for you and what you should look for when you start.
What Is Swing Trading?
Swing trading is sometimes used as a method of day trading, but financial instruments may be held for five days or more to capitalize on larger price shifts than you could get with day trading. However, stocks are not held for more than three to four weeks. The idea is to minimize the risk of a market shift by getting in and out quickly.
Tips for Success
There are many strategies and types of analysis you can use when swing trading or engaging in any other trading or investments methods. Here are the five most important tips you need to succeed.
Follow the News
Follow news outlets, such as CNBC and Yahoo Finance. Markets shift in response to news events, and such sites provide commentary and market analysis based on weekly charts, price action and volume. When trading, you should look for stocks and options that have between 100,000 and 250,000 trades per day so you do not get left holding the bag because you cannot trade your holding. Keeping up with the news will help you know which industries to keep an eye out for, which companies to watch and when you should enter and exit.
Find the Right Broker and Exchange
If you trade cryptocurrencies, you may be better off on Binance or Gdax. If your roommate trades forex, heor she may want to look into Dailyfx. Research the brokerage firms and exchanges keeping in mind what you want to trade, and look for the lowest commission and administrative fees and the best options for your needs. They are more than just a place to exchange securities and consider quotes. They may help you build a diverse portfolio, watchlist and much more.
Keep a Journal
Keep a journal using pen and paper or number processing software, such as Google Sheets, Apple Numbers or Microsoft Excel. This will become invaluable when it comes time to file your taxes. If you have a column in an Excel spreadsheet with your net gain or loss for each trade, you can easily filter by greater or less than zero; this will make filing your taxes a breeze. Note price purchased and sold, dates, position size and why you entered and left. This keeps you accountable when you struggle to keep your emotions out of your trades and, with time, may indicate your entry and exit strategy does not work for a particular market.
Never Stop Learning
If you find your cryptocurrency strategies do not work with forex. Learn which strategies to employ and what key market indicators to look out for. Track your gains and losses by financial instrument. If you are consistently losing money on options or futures, review why you entered and exited, and research which strategies you should use. The markets are always changing. If you stop learning, you will fall beneath the curve, and that can spell disaster.
Have a Year's Salary in the Bank
If you are looking to swing trade for a living, having a year's salary in a money market account will help you to not make risky decisions because you have to win big to pay the rent. This is not your bank roll. Hopefully, your salary is 25% more than your expenses so this money should last you 15 months while you learn if you can make a living off of trading. If you decide this is what you want to do for a career, look at paying yourself with your net gains.
Benefits of Swing Trading
There are many benefits to swing trading. These include application, resources, tools and mindset. This trading method is ideal for many instruments and markets, especially altcoins. Maybe you think ethereum, litecoin or bitcoin are going to continue rising steadily for the next few days,, or maybe you are interested in taking advantage of the hype of an up-and-coming altcoin but don't want to risk holding it over the long-term. This works for currencies and other financial instruments very well, too.
There are many benefits to swing trading. These include application, resources, tools and mindset.
There is a wealth of information online to help you earn your piece of the pie. These include websites, tutorial classes, PDFs, apps, e-books and video training courses. You can find information specific to forex strategies or for trading in general. Learn how to spot patterns and which patterns to look for, and join a chat group for live help and advice.
From MetaTrader to Robinhood, there are many platforms you can use to swing trade using techniques, such as the candlestick method. You may also use EAs (expert advisor software) or automated bots to help you make more trades than you could manually. This is particularly useful when you are at work during market hours.
Characteristics of a Swing Trader
Some people are cut out mentally for swing trades, making this the ideal method for them. Attributes include patience, a tolerance for large stop losses and a meticulous eye for detail with the discipline to make a few great trades rather than many mediocre ones.
Risks of Swing Trading
As with all trading and investment strategies, there are risks and disadvantages to swing trading. These include:
- Market risk
- Time
- Taxes
- Risk management
- Psychology
Swing trading is speculative, meaning if you put money into the stock market, you could lose some or most of it. If you short sell, you could end up losing more than your initial investment. Successful swing trades require regular monitoring and involves live trading so it can be difficult if you have a full-time job. Swing traders must pay for their short-term gains at their ordinary income tax rate. On a federal level, this can range from 10% to 39.6%. Investors, on the other hand, usually hold their stocks for over a year and may pay between 0% and 15% on their gains.
Warren Buffett said it best, “If you don't feel comfortable owning a stock for 10 years, do not even think about owning it for 10 minutes.”
If you do not have a solid risk management system in place, the results could be ruinous. We will talk more about this a little later. Finally, some people are not mentally cut out for swing trading, and that is okay. Warren Buffett said it best, “If you don't feel comfortable owning a stock for 10 years, do not even think about owning it for 10 minutes.” If swing trading is not for you, look for companies with years of growth, both in assets and equity.
Psychology of Swing Trading
Having a mental plan in place is the only way to become successful in swing trading. Here are three tips to get you in the right state of mind so you can achieve success.
Make and Stick to a Plan
The nature of trading on the stock market is there will be highs and lows. Never allow your emotions to make a trade for you when swing trading. Only trade based on careful analysis. Never deviate from your plan even if it means losing an entire week of gains.
Mitigate Risk to Fight Fear
Both trading and investing are risky. Experts can tell you what percentage of stocks versus bonds to hold based on your age and desired retirement date, but only you can know your risk appetite. Say you have $10,000 for swing trades. Someone may risk only $200 on a single trade. You, however, may be more aggressive and risk $500 on that trade. Note in your journal how each trade makes you feel to give you an idea of where your risk appetite is.
This Is a Marathon
You may only hold your stock from Friday evening to Monday morning, but trading is a long-term option for making money. Do not obsess over your last trade or the next. Yes, you earned a 20% return on $200 rather than $10,000, but you could have lost it all. Brush it off, and research your next moves. Look at your overall percentages, and adjust your plan if need be; then, stick to the new plan. If you take losses personally, you are not cut out for trading.
Conclusion
Swing trading is how many people make a living, but it is not without its risks. The best way to learn if it is for you is to start researching strategies, pick the best broker and exchange, create a plan, stick to it and note how each trade makes you feel. Never take losses personally. Never obsess over a trade. Learn your risk appetite, learn from your mistakes and never deviate from your plan. It is okay to change strategies, but as soon as you let your emotions drive your trading, you have lost. There is a very large pie for you to take a piece of. All you need is a steely resolve, an appetite for risk and a little start-up capital. Happy trading.
Featured Image: Image by Csaba Nagy from Pixabay
