Buy-and-hold has not been as successful as it used to be. Is swing trading a better way of making money? It is certainly possible to make money with swing trading, even if the market is moving sideways. But before you get started, you must know that successful swing trading requires a lot of discipline and experience.
It is important to understand one significant difference between swing traders and buy-and-hold investors. Swing trading is typically based on technical analysis while buy-and-hold investors rely mainly on fundamental analysis. A swing trader tries to take advantage of the short-term price movements, both upwards and downwards movements. This means that swing traders generally hold a position for just a few days up to a couple of weeks. Buy-and-hold investors on the other hand tend to hold on to their shares for years.
If you are a buy-and-hold investor who wants to try swing trading, it is very important to understand how successful swing traders make their decisions. Apart from the two differences already mentioned, it is also important to be aware of that swing trading requires much more time than standard buy-and-hold investing. Another difference is that buy-and-hold investors generally don’t go short but for a swing trader shorting is an important way of making money in a falling market. What is very important to remember about shorting that is the potential losses from shorting are theoretically unlimited.
Although commissions have become much cheaper, it is still a significant expense for most traders. Most buy-and-hold investors don’t really need to worry much about broker commissions, they don’t make many transactions. Swing traders are much more active, meaning that commissions and fees can add up to significant amounts.
With all these potential drawbacks of swing trading, why would anyone prefer swing trading over buy-and-hold? The answer is simple, the chance of making money even if the stock market does not go upwards. In a bull market which lasts for years, buy-and-hold is an easy and comfortable way of getting rich. But if the market is going sideways or downwards, buy-and-hold investors are not making much progress and may even be losing money.
Needless to say, it is quite possible to lose money on swing trading. A lot of traders lack the discipline that is required to make trading profitable. Virtually every study shows that the majority of traders perform worse than the market average. Plenty of studies have shown that a lot of traders lose money even in a bull market. So before getting started with swing trading, it is very important to consider if it is really the right thing for you.
As mentioned earlier, swing trading requires more time than buy-and-hold investing. For most people it is best to avoid watching the price movements during the day. Instead, decide what trades you are going to do outside the trading hours. This makes swing trading much more relaxed. Studies have shown that traders who watch the market all day long generally overreact to movements and tend to do worse than traders who make their decisions outside the trading hours.
Swing trading should be treated as a business, not as a hobby. And certainly not as gambling. Needless to say, it is best to have other sources of income so if your swing trading is not producing any profits, you can still pay your bills. Desperate traders generally take a lot of risks which will sooner or later backfire badly.
Note that this article has only covered swing trading shares but you can trade almost any security. Currencies and commodities are very popular amongst traders. Whatever you do, make sure to avoid swing trading illiquid securities. Derivatives should also be avoided, you can quickly lose a lot of money due to small unexpected price movements in the underlying security.