Believe it or not, swing traders have a lot in common with surfers. A surfer will sit there on their surfboard waiting . . . waiting . . . and when they finally see a nice wave beginning to form, they start paddling and ride the wave for as long as they can.
Swing trading is basically the same thing, except traders are looking for a rising stock or other type of investment to hop onto in order to make a quick buck. Sounds like fun, but is swing trading really a winning investing strategy? Let’s dive in and take a closer look.
What Is Swing Trading?
Swing trading is a type of investing style where someone buys a stock and holds it for a short period of time (usually somewhere between a couple days or a few weeks) before selling it for a profit. The goal is to make a profit from a stock’s change in price during that time frame, and then move on to the next one.
How Does Swing Trading Work?
First, swing trading strategies usually involve looking at trends and patterns to help swing traders find stocks or investments that are about to rise or drop in price. If they believe that a stock is about to “swing” upward in price over the next few days or weeks, then they’ll buy the stock and sell before the price starts to drop again. If they think the price is about to freefall faster than a skydiver leaping out of an airplane, they’ll “short” the stock (which means to “bet against” it) instead.
Market chaos, inflation, your future—work with a pro to navigate this stuff.
Most of the time, swing traders decide whether or not to make a trade by weighing the risks and rewards of a potential deal. For example, if a swing trader believes that the price of a stock might double in value in the next week, they might be willing to take that risk and buy some shares. But if the price might only rise a dollar or two? A swing trader might pass and see what else is out there.
Because of the short time frames between trades, that usually means that swing traders are more than happy to settle for smaller profits on each trade and cut their losses quicker than other stock traders. The idea is small wins over a long period of time will add up. The problem is one big loss on a trade could wipe out a lot of progress made from all those small gains.
Swing Trading vs. Day Trading: What’s the Difference?
Swing trading and day trading are very similar. Both involve buying and selling stocks in an attempt to make a profit, but the biggest difference between them is time.
Swing traders will hold onto a stock for days or weeks while the price continues to rise or fall. Day traders don’t have the swing trader’s “patience” (we’re using the term very loosely here). They’re swapping stocks in a matter of hours (or even minutes), buying stocks while sipping their morning coffee and selling them off before they go to lunch, so to speak. This kind of trading amplifies the time commitment, emotional stress and risk involved with buying and selling stocks.
Both forms of buying and selling stocks are incredibly dangerous and have plenty of pitfalls. Both day traders and swing traders have to worry about commissions and fees eating into their short-term profits, and a string of bad trades can send a day trader or swing trader’s portfolio up in smoke. Did we mention it was stressful?
Here’s a Better Way to Invest
Like we mentioned, swing trading focuses on small gains over the short term . . . that’s just not going to cut it!
When it comes to investing, we recommend looking beyond what’s happening over the next few days and weeks. That involves taking a buy and hold investing strategy, which means you’re hanging on to your investments through the highs and lows of the stock market. After all, the stock market has an annual average rate of return between 10–12% since 1928.1
That’s why we also recommend diversifying your portfolio with mutual funds instead of chasing after single stocks and their constantly swinging prices. When you buy shares of a good growth stock mutual fund—which are usually filled with dozens of stocks—you’re basically spreading your risk and building a portfolio that can withstand the ups and downs of the stock market. This makes mutual funds the perfect type of investment for long-term investors who want to lower their risk and build wealth over time!
Work With a Financial Advisor
Trying to invest on your own is like trying to perform a root canal on yourself. In other words, very difficult and very painful! But the good news is you don’t have to figure all this investing stuff out on your own.
The SmartVestor program can help you find a qualified financial advisor near you who can guide you and help you come up with a plan for your money.
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This article provides general guidelines about investing topics. Your situation may be unique. If you have questions, connect with a SmartVestor Pro. Ramsey Solutions is a paid, non-client promoter of participating Pros.