Define & Discuss: Swing Strategies

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I could use some quick help. I was recently at a Meetup event for novice investors, and the presenter said that he’d earned well over five figures by investing his savings over the last three years. That blew my mind. I assumed that only day traders could make that amount of money.

It also got me to thinking about a presentation I had to give this coming week to my finance and investment class. I’m supposed to define and discuss an investment strategy of my choosing, and swing trading seems like a good choice. I’m curious about how likely it is to make large profits from swing trading compared to day trading? Also, what’s the best way to present the strategy to a classroom of freshmen?

Accurately explaining an investment strategy to novices isn’t an easy undertaking. You’d be surprised how difficult it is for even the most seasoned investors. At the end of the day, understanding investing is much more complicated than necessary. The New York Times writer, Sendhil Mullainathan, published an article explaining why investing is so hard, and how to make it simpler. You should read that first. Much of what he wrote will likely strike a chord or two with you and your classmates. More importantly, it will help frame your discussion about swing trading.

Since you’ve already mentioned day trading, it would make sense to introduce swing trading by comparing it to the other major types. You can rely on Investopedia for a comprehensive, yet accessible, introduction to swing trading. The author, Jason Bergen, says that swing trading is a kind of middle ground between hurried day traders and patient trend traders. You’ll want to further explain that, as the name would suggest, day traders don’t hold stocks for longer than a day. Trend traders, on the other hand, examine long-term patterns, and will often hold stocks for weeks and even months. Some readers are likely to walk away from that resource, under the impression that swing trading is ideal for beginners. However, that may not be the case.

Andres Cardenal at The Motley Fool makes a rather convincing argument against swing trading. He discourages most active trading, for its long-term tendency to undermine larger profits. The whole article leverages a statistical study published by researchers at the University of California’s Graduate School of Management. They conclude that the more actively you trade, the lower your returns will be long-term. Your audience will probably wonder how that could be possible.

Day trading is no exception to what Andres Cardenal was discouraging, because it’s even more active than swing trading. There’s always another perspective to consider, though. Cory Mitchell at The Balance paints a much more favorable picture, while weighing the pros and cons of day trading versus swing trading. He openly compares the different investment timeframes, capital requirements, and profit earning potentials. The conclusion from his standpoint is that day trading often yields higher profits on smaller accounts. In other words, if making money as fast as possible is your ultimate end-game, then day trading is the better way to go.

That doesn’t mean there’s no money to be made when it comes to swing trading. It’s important to remind your classmates that profits can still be made, albeit on a much different time frame. You should also consider the various types of swing trading strategies being utilized. They can make a big difference. There’s no shortage of viable approaches to either day or swing trading. The key is deciding what makes the most sense for you. There’s some foundational work to be done before you can make an informed decision. Staff writers at the US Securities and Exchange Commission (SEC) maintain a public checklist of ten things to consider before making investment decisions. Those are the first steps for any aspiring investor, well before they can sit down and commit to a short- or long-term strategy.

“The majority of short-term trading results are just random. In the long term, the money ends up with those that can trade and manage risk.” – Steve Burns

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