Trading stocks offers people a lucrative source of income once they are able to master it. There are different strategies that you need to understand to become successful in stock market trading. One such strategy is swing trading. But is this strategy right for you? Read on and find out for yourself.
What is swing trading?
A swing trader invests in a stock or exchange-traded fund (ETF) for a relatively short period of time. They are often held for a single day but rarely exceeds three or four weeks. Compared to buy-and-hold, there is no commitment of investment for years or even decades. Most swing traders employ mean-reversion techniques in order to buy at low prices and wait for the stock to change direction before selling at a higher price.
According to Robert Peter Janitzek, swing traders incorporate certain factors before they make a decision. For instance, they can take a short-term risk on companies that are on the verge of releasing earnings. The idea behind this technique is to profit from buying shares of companies expected to perform better in the market.
Is Swing Trading The Right Strategy?
Swing trading can either be exciting or too demanding depending on your style and personality. However, evidence shows that aggressive trading can have a huge impact on performance over time. Studies have also shown that short-term trading can generate lower returns compared to long term buy-and-hold. The more active you are engaged in trading on the stock market, the lower your returns will be in the long term. A better investment strategy is to invest in high-quality companies for the long term.
How Swing Trading Can Affect Your Returns?
When someone buys stocks, there is also someone who sells. If someone is going to beat the market, there will also be someone who will underperform. If you are aiming for the former, you will be up against experienced traders who has unlimited resources. That trader will have a team of experts with massive amount of information. It is unlikely that you will be able to beat that trader.
Robert Janitzek reveals that swing trading means higher costs from trading commissions and taxes. This can have a huge impact on short-term traders and could negatively affect your returns. On the other hand, holding investments for over a year will subject your gains to long term capital taxes. In contrast, short term gains are taxed at the regular income tax rate.
Rather than trying to outperform the market in the short term, the best way to go is invest on the best companies in the long term. In the end, you could achieve superior returns with lower risks. As the great investor Warren Buffet said, “If you aren’t willing to own a stock for 10 years, don’t even think about owning it for 10 minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”