Swing trading is the term used in the context of trading in financial markets, in case of swing trading an individual take a long or short position depending on his opinion about stock or index and this position is kept open for many days or weeks so as to profit from index or stock moving in anticipated direction of an individual. In order to understand this term better one should look at the advantages and disadvantages of swing trading –
Advantages of Swing Trading
More Time
The biggest advantage of swing trading is the time factor because in case of intraday trading an individual has to square off all the positions immediately before the stipulated time for trading whereas in case of swing trading an individual gets more time as he or she can square off all the positions according to convenience and not according to time.
No need of Daily Monitoring
Another benefit of swing trading is that unlike intraday trading which requires constant monitoring by the trader in case of swing trading an individual does not need to watch stock price every minute. Hence if you are one of those individuals who is doing job or business and do not want to leave that job or business then this method of trading is suitable for you.
No Sophisticated Tools
Another advantage of this trading is that it does not require sophisticated tools and algorithms which is the case with intraday trading as intraday trading is more about price and quickness of trading which requires tools in the hands of the trader so as to act swiftly according to price and volume action in stock or index. Hence in simple words swing trading can be done by anyone without any sophisticated tools or computer algorithms as this type of trading do not require speed rather it requires correct analysis of the movement of stock or index.
Disadvantages of Swing Trading
Higher Margin Requirement
Swing trading is more about conviction and if you are keeping positions open for many days than margin requirement will be high because stock price does not always move according to your will and that is the reason why this type of trading can be done only by those people who have deep pockets. Hence in simple words, a higher margin requirement is one of the factors which can discourage people from becoming a swing trader.
Risk of Loss
Another limitation is that there is always that risk that stock or index may move in the opposite direction of the anticipated move of swing trader which will result in a loss for the trader. In simple words swing trading does not guarantee profits rather the magnitude of loss can be much bigger than intraday trading.
No Rotation of Capital
In case of intraday trading one can buy and sell stock many times and thus can rotate capital so as to earn good returns but swing trader cannot rotate capital resulting in trader locking his or her capital into a single trade which may or may not give returns to the trader.
As one can see from the above that swing trading has its own pros and cons and as an individual if you are thinking of doing this type of trading than you should carefully read above points and then decide whether to go for this type of trading or not.