This post is found as chapter 2 in my newest book The Ultimate Guide to Swing Trading available on Amazon.
Swing trading can be a good fit for people of all experience levels because it has many benefits over other trading methods. Let’s consider the three major categories of any trading method, psychology, risk management, and system management.
The psychology of swing trading can be easier to manage because it’s typically less stressful and mentally taxing than other methods. Swing traders can limit their trading signals to the open and/or the close of the day for their market of choice. For 24-hour markets, a swing trader can pick the most meaningful time with the highest volume to execute their entry and exit signals. The required screen time is dramatically lowered for swing trading compared to day trading, scalping, or trading markets that rarely if ever close, like futures, forex, or cryptocurrencies.
A day trader may need to trade all day, while a swing trader may need only minutes to execute entries and exits. When a swing trader’s positions are moving in their favor, and there is no exit signal, they may not have to make any trades for days. The mental and emotional strain of trading for minutes a day is much less than spending a whole day watching for price action signals.
Swing trading can also put distance between a trade entry and the trade outcome because there is more time to see how it plays out. The stress on day trading may be more intense because entries can have immediate consequences. A day trader needs to concentrate on the position for the exit, which may be a quick stop loss, or watch for hours to take profits at the right moment. A swing trader can enter a trade in the morning and check back in near the close of the day or enter at the close and check back in at the next market open. A swing trader can stay mentally fresh with the time gap from trade entry to trade outcome.
The risk management of swing trading can expose less capital to risk over shorter periods than other methods. Swing trading requires less position size than day trading because the moves can be over multiple days for larger profits. This means less capital is required because the percent gain can be higher. Also, a swing trader doesn’t have the same stress of drawdowns during bear markets as a buy-and-hold investor will experience. Swing traders are more likely to be in cash, have short positions, or have limited exposure than most investors during market corrections and downturns.
Most day trading strategies require more capital at risk to make trades meaningful that are only trying to profit off small intraday moves in most cases. Day traders, for the most part, try to profit from intraday moves of dimes to dollars in price, while a swing trader aims to profit from multiple day moves of dollars, ten dollars, or even one hundred dollars for high price stocks. A day trader might be happy with a single percent move in the stock in a day, while a swing trader aims to profit from double-digit stock moves. The larger size of the move doesn’t require as big of a position size to be meaningful versus day trading.
Swing trading systems can be less stressful to trade than most trend trading systems as swing traders don’t take as much of a drawdown in open trades as trend traders. A trend trader is more willing to risk open profits for the chance of bigger gains by staying in a trend for a longer time frame than a swing trader will. A trend trader will hold through a market pullback after the swing trader has already locked in profits. A swing trader wants fast dollars and is ready to move on quickly to the next swing on another chart and is not interested in fighting hard through positions that move sideways for days or weeks and pulls back too far.
For example, with a 5-day exponential moving average / 20-day exponential moving average crossover signal, a swing trader would lock in profits around the 70 RSI. In contrast, a trend trader would stay in the trend until the 5-day EMA crossed back under the 20-day EMA. A swing trader is satisfied with a smaller profit, but a trend trader wants to stay in a trend until it is over. A swing trader will take a profit early and stay out of any reversals, while a trend trader will remain in a small pullback now for the chance of a huge profit later. Sometimes the swing trade exit is perfect, getting out before a reversal, and other times, the trend continues. Sometimes the swing trader makes more money than the trend trader because they locked in profits while they were available. Other times, the trend trader stays in a trend through some small pullbacks and receives a bigger win than the swing trader’s profits. The market chooses whose strategy was the best for each trade, but it is up to the trader to choose what they are most comfortable with, swing trading or trend trading, as there are profitable systems for both methods. Swing trading is usually the most comfortable to trade as it has fewer givebacks of paper profits. It can be frustrating when a swing trader exits and the trade becomes a huge winner later. It can be even more frustrating for a trend trader to give back most of their profits as their trailing stop is triggered so late in a fast reversal. There are tradeoffs for each approach; the critical thing is which one you can execute with real money.
In this example of the ARKK chart, the 5-day EMA crosses over the 20-day EMA and runs up to the 70 RSI and stalls where a swing trader’s profit target would be before going even higher above the 70 RSI and then later rolling over to lower prices. If a trend trader had let this winner run until the 5-day EMA crossed back under the 20-day EMA, the swing trader would have outperformed the trend trader. In this example, the swing trader would have been exposed to risk for less time and created a higher return and higher risk-adjusted return. The swing trader would have exited earlier with more profits than the trend trader.
The smaller position size needed to make swing trades profitable versus day trades lowers the risk exposure of total capital at any given time. However, swing traders add overnight risk to their system to profit from gaps and multiple-day moves that day traders miss as they focus only on intraday price moves. A sound swing trading system can lower risk exposure of capital through smaller position sizing and increase returns by increasing the magnitude and size of winning trades by increasing the time frame of any one trade. Holding overnight can add an element of risk to swing trading versus day trading when gaps go against a position. Over the long-term, holding overnight has been where the bulk of returns have historically come from in the stock market versus open to close movement. A swing trader has a larger profitable range of prices to work with than a day trader. Day traders like having no overnight risk, but swing traders embrace it because that is where the opportunity is for profits. Day traders are glad when they have risk off when the market gaps down, but swing traders are happy when they are long, and the market gaps up.
Managing swing trading as a method requires less screen time than day trading and can involve a smaller watchlist than trend trading. One thing that few traders consider when choosing their trading method is the time involved in the execution of the strategy and the value they place on their own time. The first step in developing a trading system is the time spent in research, backtesting, historical chart studies, position size structuring, and deciding on the parameters for selecting items for their watchlist to trade. After creating and testing a system, which can be similar in time for most trading methods, a trader moves on to live trading implementation and management. This is where the time requirements for execution can diverge dramatically.
The time management for a trading method can range from taking a few minutes at the end of the week for a weekly trend trading system to over eight hours a day most days of the week for a day trading system. For example, a trend trader may only need a few minutes in the morning or afternoon if their positions are all winning with no trailing stops being triggered if they trade the long-term trend. This contrasts greatly with the day trader of stocks who may need to be preparing for their day an hour before the market opens and stay focused for the entire seven and a half hours the market is open. These are extreme examples as some trend traders watch price action more closely, and some day traders only trade the opening hour, closing hour, or focus on news-driven events, but you see the variance. There can be a huge difference in the time it takes different types of traders to execute their process in real-time, depending on the required screen time and how long it takes to manage their watchlist.
The variance between the time it takes a trader to manage a swing trading system versus a day trading system can be huge. A swing trader of stocks that only makes trade adjustments at the open and close may only need as little as 2.5 hours a week to review their watchlist and execute their entries and exits, while a day trader could need to work over 40 hours a week between research and screen time. If both traders using the time management examples above made $2,500, the swing trader would make $1,000 an hour (2.5 hours / $2,500) while the day trader would make less than $62.50 an hour (40 hours / $2,500). This is a huge variance and why it’s crucial to value your time as a trader. A swing trader is risking less of their time with their strategy, while a day trader could lose a weeks’ worth of their time along with some money if they are unprofitable. A swing trader decreases their time risk and focuses on their capital at risk. A swing trader can have a better quality of life and have the time to pursue other interests.
Of course, hugely successful day traders love what they do and make it worth the time and energy they devote to it, and they enjoy the game. But this chapter is about the benefits of swing trading, which I have focused on. Swing trading can be an excellent place for new traders to start as it lowers stress levels with both less needed capital at risk and fewer screen time requirements. Swing trading can also be a good place to start for aspiring traders with jobs as entry and exit signals can be executed at the open or the close, only requiring small increments of time around a typical job. It is also possible for swing traders to drop down to the intraday timeframe when needed if a market becomes volatile so that you can set flexible parameters based on your own system goals. Swing traders can execute signals at the open, the close, or a combination of both, depending on their strategy parameters. Swing trading can be a flexible and robust trading method with both time management and capital management benefits.
The rest of this book is available on Amazon here.