What Is Swing Trading? | Swing Trading Explained In Detail
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Swing Trading

What is Swing Trading?

Options traders are always concerned with risk and reward, seeking the right balance to optimize their profits while minimizing risk. 

David Jaffee of BestStockStrategy.com has taught more than 1,500 students how to trade options the right way, while reducing risk. 

However, if you have a higher risk tolerance, you might consider swing trading. 

Keep reading to learn about swing trading and selling options. 

Swing Trading Definition

Swing traders attempt to identify the next move in an asset’s price and enter a position based on that expectation. 

By analyzing the risk and reward of a trade, swing traders attempt to profit by capturing a part of a potential price move. 

Swing traders typically hold a position for longer than a single trading session, but they do not hold a trade for more than 4 - 6 months. 

Swing traders can focus on stocks that are volatile with a good deal of movement or keep their attention on less volatile stocks. 

Overall, the definition of swing trading is very broad in nature, and the technique can be applied in a variety of trading situations. 

Pros and Cons of Swing Trading

Swing traders utilize the price action of an asset and assess trades based on the risk / reward ratio. 

Because swing trades are short-term in nature, traders often use technical analysis to determine if an asset looks favorable.

Swing trading does not take as much time as day trading, and swing trading provides a greater potential for short-term profit. 

Swing traders have to create a strategy so that their wins outpace their losses. They have to determine which trade setups can lead to predictable price moves, and there is no guarantee that their strategy will work. 

Is Swing Trading Profitable? 

Swing traders can sustain major losses due to abrupt market reversals; their trade positions can also be impacted by overnight and weekend market risk. 

Swing traders can also potentially miss out on long-term trends because they favor short-term market moves.

Through swing trading, traders attempt to take advantage of small moves within a larger trend. 

While swing trading does not produce large wins, it can produce small wins that add up over time. 

The primary problem with swing trading is that each trade has a probability of profit below 50%. There is no statistical edge when swing trading. 

Each movement in the stock corresponds to a direct positive or negative move in your P&L statement.

When you add in trading costs, the emotional toll of trading, and people’s propensity to cut winners short and let losers ride, then most swing traders engage in a trading activity where the probability for profit for each trade is around 40%.

Even the best swing traders are engaging in an activity that has a probability of profit equal to a coin flip, assuming zero transaction costs and slippage.

When you factor in the opportunity cost of your time and education, it’s no wonder that most swing traders are unable to be consistently profitable. 

Even so, swing trading is more profitable than day trading because of the upward bias in the stock market. 

If a swing trader is able to “ride” a stock up, then it is possible for that trader to be profitable as long as the stock market cooperates. 

This success is not necessarily attributed to skill or strategy, and it may simply be attributable to luck and timing. 

If you’d like to utilize more strategy in your trading, David Jaffee recommends selling options to win up to 98% of your trades

Options Trading and Swing Trading 

The definition of swing trading is fairly broad. 

In essence, swing trading involves buying and selling stocks when technical analysis indicators are present for an upward or downward trend. 

While swing trading can technically apply to selling options as well, it usually refers to stocks / equities. 

Selling options offers a higher probability trade than swing trading equities (or indices).

Traders can realize a much more capital-efficient transaction when selling options, and selling options is recommended as the best and safest options strategy (when done correctly and buying options to reduce portfolio volatility).

Long-term investors will often hold options as a way to offset their stock holdings during a volatile market. 

Options contracts offer greater volatility and leverage than the underlying asset. If a stock is volatile, the value of its options can increase significantly. As a result, many traders are drawn to day trading, or swing trading options in hopes of capturing large profits.

An out-of-the-money option could triple in value overnight if the trading session is volatile. 

In order to profit by swing trading long options (purchasing call options), traders need to pick the right direction as well as the timeframe. 

David Jaffee rarely recommends buying call options with an expectation of profiting because options are usually overpriced (with the expected move almost always more than the actual move). 

As a result, option buyers are paying more for an expected move that rarely materializes.

When buying options, choosing the right direction for a stock’s swing is not enough, and you could experience a loss if a move takes longer than expected. 

However, it's extremely important for options traders to buy put options during periods of complacency to protect their portfolio from large volatility swings. 

The market tends to move fall much faster than it rises, as a result, put options can gain value quickly and reduce drawdowns.

Should You Swing Trade Options? 

Swing trading is not for beginners. 

A trader must also have a great deal of risk tolerance to swing trade options because your account balance can fluctuate quickly. 

On the other hand, selling options offers more stability for swing traders. 

Swing traders who buy options are able to limit their risk and take advantage of a stock’s volatility without having to buy the stock. 

However, as stated previously, buying options has a very low probability of profit (although it's important to buy put options to reduce portfolio volatility). 

Learn How to Sell Options

If you are searching for the best options trading strategy, consider selling options. 

David Jaffee offers a comprehensive options trading course to help you win up to 98% of your trades. 

Visit BestStockStrategy.com to learn more about selling option premium and receive $400 worth of free training material.

Frequently Asked Questions (FAQs)

What is swing trading?

Swing trading is a speculative trading strategy in financial markets where a tradable asset is held for one or more days in an effort to profit from price changes or 'swings'.

Is swing trading profitable?

Swing trading can be profitable. Swing trading is a much better strategy than day trading. Even so, there is no statistical edge when swing trading and most swing trading involves buying and selling equities or indices, which are capital inefficient.

Can I swing trade options?

Yes, definitely. The definition of swing trading is very broad, so, technically, selling options is swing trading.

Even so, it's important to purchase put options, or trade vertical credit spreads, when trading to reduce tail risk and portfolio volatility.

How much money do you need to be a swing trader?

You can start swing trading with a few hundred dollars, although it's best to have an account size of at least $2,000.

Is options trading better than swing trading?

In general, options trading is better than swing trading, but options trading is also very risky because it involves leverage and if options traders buy or sell too many naked options then they can quickly be forced into a margin call.

Realistic swing trading returns?

In my opinion, most swing traders will lose money. Swing traders mostly rely on technical analysis, which is unproven, and they will often trade speculative stocks.

Even so, it is possible to earn ~1% - 2% a month by buying oversold large cap, quality companies or indices when they're oversold.

About the Author David Jaffee

I (David Jaffee) help people become consistently profitable traders while minimizing risk. I graduated from an Ivy League University and worked at some of Wall Street's most successful investment banks. Subscribe to my YouTube channel for valuable videos - BestStockStrategy YouTube Channel​. Finally, if you're looking to Land a Finance Job, then I've put together the best step-by-step course at LandaFinanceJob.com. My personal website is DavidJaffee.com.

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