Throughout the course of 2020 and 2021, the stock market saw some drastic highs and shocking lows. February and March of 2020 were particularly hard on the New York Stock Exchange, when US stocks saw the fastest decline in history — with some falling 20% or more. But then those aforementioned highs came, and the S&P 500 closed at the highest value in its recorded history: 3,756.07 points, by year end.
The reasons to panic and sell or buy the euphoria are numerous:
- the spread of COVID-19,
- the subsequent supply chain disruptions that followed,
- the boom of meme stocks,
- the rise of cryptocurrency,
- whether inflation is here to stay
- the election year uncertainty.
The ups and downs bring opportunities for a certain type of trader. Known on Wall Street as swing trading, the aim is to profit from of a stock’s short- or medium-term gains over the course of a few days, weeks, or months by buying up stocks, waiting for the price per share to increase, and then selling them off. But is this speculative financial strategy really more profitable than traditional investing?
How Profitable Is Swing Trading?
Swing trading exists in the middle ground between investors who purchase a stock with the intent to hold onto it for the foreseeable future and traders who buy and sell multiple stocks within a single day (day traders).
They buy stocks forecasted to face upward or downward trends, then hold onto them for a few days or weeks in anticipation of the forecasted trend. The goal is to profit from small rises and falls within a stock’s larger upward or downward trend over the short-medium term. But can this strategy really be profitable?
The most profitable swing traders have enough time to fine tune a strategy, enough money to handle losing some as that strategy is perfected, and enough patience to sit and wait for forecasts to come true (or, in many cases, prove to be false).
Swing traders have the opportunity to gain as much as 5% or more weekly and exceed the returns of investors by relying on daily charts. The sum of a lot of small winning trades is the key to success.
Investors can generate these types of returns too but that’s usually because they’re holding stocks for the long-term through multiple fundamental events, such as earnings.
Realistic Swing Trading Returns
With more than 50% of U.S. adults claiming to have money in the stock market in 2021, the majority fall into the bucket of investors. They are tethered to the markets through 401k and other retirement plans.
Swing traders fall into the bucker of TRADER, not investor. They don’t hold for the long-term. They’re in and out, transacting more frequently.
A bad swing trading strategy can be very costly — consider all of the meme stocks that lost $26 billion in market value this past summer, for example. If a swing trader bets big on a stock forecasted to rise, only for it to plummet, returns can be dismal.
However, with a successful strategy, an eye for opportunity, and the proper funds to maturely wager an appropriate position size, then it’s not completely unrealistic to expect a swing trader to bring in annual returns ranging anywhere from 10 to 30%. Some champion traders can do significantly better.
How does that tally with the 5% returns weekly discussed above?
Well not every week will be a winning week. Over the course of the year an investor locking a return of 20% would rival the best investors in history. For context, Warren Buffett’s Berkshire Hathaway (BRK.B) has generated an average of 20% annual returns.
Again, it bears repeating that this is all dependent on how much work a swing trader is willing to put in to perfect their craft. A part-time swing trader who can’t afford to watch their charts on the regular simply won’t be bringing in these kinds of returns.
Is Swing Trading A Good Strategy?
Now that there’s a better understanding of how profitable swing trading is and what some realistic returns for swing trading are, it’s worth weighing the pros and cons of swing trading compared to traditional investing.
Which is going to come with the most time commitment? The most financial investment? The most risk? The most returns? Let’s compare.
Swing Trading Pros
- Less stressful and less time-consuming than day trading, which requires investors to be checking their charts every 15-30 minutes at least
- Can be extremely profitable with the right strategy, opportunity, and position size
- Your money is never in one place for very long, unlike traditional investments which can see your money set aside for years or even decades
Cons of Swing Trading
- Requires a daily — sometimes even hourly — time commitment for technical analysis and planning
- Overnight and weekend price gaps can completely throw off even the most finely tuned swing trading strategy
- Buying too late or selling too early can result in severe losses and the feeling of missing out
- Trading costs add up quickly, especially during such an unpredictable market like the one being experienced now
- Swing traders may pay higher taxes locking in short-term gains vs long-term investors
Swing Trading Vs Investing
Now that the pros and cons of swing trading have been outlined, let’s compare these benefits and downsides to those of traditional, long-term investing.
To begin with, long-term investing requires little to no active participation from the investor. They’re investing for their future, which means they’re less concerned with the daily or even the monthly performance of the stock they expect to hold onto for decades to come.
Beyond this, traditional investing also comes with arguably less risk. A swing trader with a few concentrated positions can lose far more in a single day than a long-term investor with a diversified portfolio is likely to (save for some scenario like a stock market crash where everyone would obviously be losing all at once, regardless of strategy).
On the other hand, though, long-term investments require a lot of time and patience that may frustrate some. Additionally, traditional investing might seem just plain boring to those who’d rather keep up with the fast-paced, highly unpredictable nature of the stock market during the day-to-day. As much as anything, the swing trading vs investing debate really boils down to something as simple as time.
The Bottom Line: Is Swing Trading More Profitable Than Investing?
Ultimately, while swing trading might be more profitable than investing for skilled traders in the present, swing trading is just as likely to be more fruitless than long-term investing for the less adept, as well.
Is the increased risk worth the chance at increased reward, or would you rather be patient, play it safe, and possibly come out on top of the swing traders (even if it takes a few decades to get there)? At the end of the day, the choice is yours alone.
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