It seems like everyone knows about day trading, where people sit in front of a computer and execute trades on a daily basis to realize a profit. However, that eats up a lot of valuable time, even with automated trading. Another option is to engage in swing trading, which offers the same money making opportunities as day trading but over a longer period of time. Following are three tips to help with understanding swing trading and why it may be better for you than day trading.
Increased Returns Over Short Periods of Time
Swing trading has an inherent advantage over day trading in that the potential is there to make more money in a similar amount of time. Day trading focuses on trading a stock on either the same day it’s bought or the day after when the stock increases to a desired value. Since many stocks don’t make large swings in any given day, a day trader typically sees small returns. On the other hand, a swing trader leaves the trade in place for longer and realizes a larger profit than the day trader.
Easier to Overcome Costs of Trading
When you hold stocks for less than one year, you have to pay taxes on your earnings in your tax bracket. Personal income taxes tend to be at a higher rate than capital gains taxes, but you can’t use the capital gains taxes for the stock income if you only held the stock for a few days or weeks. So you have to save money somewhere, but how?
When you make a trade, you have to pay a brokerage fee, and if you’re day trading, you’ll spend a lot of money in brokerage fees. Holding a stock for a few days allows you to realize more profit on a stock that helps pay for those fees and reduces your out-of-pocket costs.
Take Advantage of News Releases That Cause Stock Prices to Rise
Swing trading requires investing in stocks that can sell quickly, also known as liquidity. The problem is, swing traders have to compete with professional traders to get ahold of popular stocks with liquidity. The interest of professional traders in major stocks makes it harder for a swing trader to enter the field and execute their short-term buy-and-hold strategy. However, swing traders can benefit by putting their trade into an up-and-coming stock.
When the news coming out of a company is good, it draws positive attention from traders. Holding onto a stock that catches the attention of professional traders and the overall market can result in an upward price swing. That upward turn results in a larger profit for the swing trader who bought the stock days before the announcement.
Swing trading comes with the same risks as any other style of trading, and caution should always be exercised. However, on the plus side, swing trading offers the opportunity to make money without the need to maintain long-term stock investments or spend the time and trading fees required for day trading.