Swing Trading vs Buy and Hold

What is Swing Trading:

Swing trading refers to the method of trying to profit from market fluctuations of a minimum of one day and as long as many weeks. In opposition to swing traders, day traders usually are in and out of the market in one day, and trend traders usually hold positions for numerous months. So, in terms of the length of holding a trade, swing traders are in-between day traders and trend traders.

Each kind of trading has its advantages and disadvantages. The appeal of swing trading presents plenty of opportunities to trade; the dollar risk per trade is lower than with trend trading because of closer halts; it provides higher profit opportunity per trade than day trading, and immediate rewards provide heartfelt satisfaction. The downside of swing trading is that you must work hard to maintain trades; you are pretty likely to miss important moves where huge profits can be made, and regular trading results in higher commission costs.

A good argument can be made that beginning traders would be well-served, to begin with, swing trading as it provides enough trading action to earn experience; losses can be kept to acceptable levels with proper stop loss methods, and it presents a good perspective to learn about both the short-term and long-term movements of markets.

Swing Trading Methods:

There are a number of methodologies to profit on market swings. Some traders favor trading after the market has strengthened a change of direction and trade with the developing momentum. Others may prefer to enter the market on the long side after the market has fallen to the lower band of its price channel—in other words, buying short-term weakness and selling short-term strength. Both strategies can be profitable if executed with skill and discipline over time.

Is Swing Trading Right for you?

Depending on your own habit and personality, swing trading can appear impressive, or perhaps too complicated and demanding. Nonetheless, the evidence indicates that trading too actively can be a major burden on performance over time. According to different studies, short-term traders usually achieve materially lower returns than long-term buy-and-hold investors.

A popular statistical study from Brad Barber and Terrance Odean from the Graduate School of Management at the University of California have a sharp and powerful headline: “Trading Is Dangerous to Your Wealth.”

The authors explained the returns of 66,465 households with accounts at a large discount broker from 1991 to 1996. According to their findings, those that traded more often earned an annual return of 11.4% over that period, while the average account made 16.4% annually.

To put the numbers in view, an investor with a $100,000 portfolio making active-trading returns of 11.4% over six years would end up with an account worth of $191,122. The average investor, on the other hand, would conclude that period with a much bigger portfolio value of $248,724. Over the period under review, active trading would have reduced the value of your capital by 30% in contrast with the average investor. For longer periods, active trading can be even more expensive.

Trading vs Buy and Hold:

The goal of most investors usually is to buy low and sell high. This can result in two very different ways of equity investing.

One approach is defined as “trading.” Trading includes following the short-term price variations of different stocks closely and then trying to buy low and sell high. Traders usually determine ahead of time the percentage gain they’re looking for before you sell (or decrease before they buy).

While trading has great potential for immediate rewards, it also involves a fair share of danger because a stock may not recover from a downswing within the time span you’d like—and may, in fact, drop further in price. Also, regular trading can be costly since you may pay the broker’s fees for the transaction every occasion you buy and sell. If you sell a stock that you haven’t held for a year or more, any profits you make are taxed at the same rate as your usual income, not at your lower tax rate for long-term capital gains. Buy-and-hold investors still need to take price inconstancies into account, and they must pay attention to the stock’s ongoing performance. Naturally, the price at which you buy a stock directly affects the possible profits you’ll make from its sale. So it makes sense to buy the stock at a price you think is reasonable. While you hold the stock, it’s also essential to watch for signs that your investment isn’t going the direction you thought—for example, if the company regularly misses its earnings targets or if developments in the industry turn bleaker.

A very different investing strategy—called buy-and-hold—involves holding an investment over an extensive period, assuming that the price will rise over time. While buy-and-hold decreases the money you pay in transaction fees and short-term capital profits taxes, it demands patience and careful decision-making. As a buy-and-hold investor, you generally pick stocks based on a company’s long-term business prospects. Increases in the stock price over years tend to be based less on the unpredictable nature of the market’s changing demands and more on what’s known as the company’s fundamentals, such as its incomes and sales, the expertise and vision of its management, the fortunes of its industry, and its place in that industry.