What is Swing Trading and Is It the Right Options Trading Strategy for You?

This blog has covered day trading and scalping, and of course it has covered the benefits of making long-term investments. What, though, about the missing middle?

What happens to the trader who wants to move faster than months but who is not quite caffeinated enough for the life of a day trader?

Welcome to swing trading. (Note: Readers who have not done so yet might want to brush up on some of the fundamentals of Greeks and technical indicators. It might make the rest of this post a little easier.)

What Is Swing Trading?

Swing trading, in a nutshell, is when you trade for a “medium” period of time. A typical swing trader will hold onto investments for a period of one day to several weeks. Critically the swing trader holds onto his investments at least overnight, unlike day traders who make their trades before the market closes.

The idea behind swing trading is to take advantage of short- or mid-term fluctuations in the market. For example, a trader might rely on technical indicators that show a stock entering a period of unsustainable growth or abnormal weakness. Depending on the data, the trader could decide that the stock is due for a near-term correction and purchase an option with a two-week expiration date.

Or a trader might chart the delta and vega of various stocks, trying to decide how shifts in and the news cycle might affect near-term earnings.

There are as many ways to swing trade as there are to play the stock market, but essentially this is about trading within a short-term window that lasts through at least one market closure.

What Are the Benefits?

For a well-informed investor, swing trading allows a far more dynamic portfolio. You can take advantage of short-term cycles in the market instead of riding them out the way you would with a long-term investment.

That can line up very well with options contracts.

Swing trading allows active investors to take advantage of temporarily over-and under-valued stocks or to move quickly in response to recent events. Capturing trends is the bread and butter of an options trader, who makes money off changes in value, and it is what swing traders try to do too. There is a lot of potential for these two strategies to work well together.

It requires an enormous amount of information though. Trading on your gut will not cut it here.

Fortunately, data is not always tough to come by.  We invite you to take a look at our Market Timer system for pulling down trends. You will be amazed by what you find.

Which leads us to the risks…

What Are the Downsides?

There are two key risks to swing trading.

Take risks, just pay attention to the red flags so they can be smart risks.

The first is the risk that accompanies all high-volume trading; for the average investor, a highly active portfolio will tend to underperform the market. There are a lot of reasons for this, but they boil down to the truth that beating the market is hard.

Not a whole lot of people can do it.

The other risk to swing trading is pursuing under-informed decisions. As mentioned above, doing this right takes an enormous amount of data. It is not enough to catch a headline in the Wall Street Journal, because if everyone else saw the same thing, then the extrinsic value of that trade will go through the roof.

No, you need to dig deep. Your strategy might be more high-volume than a long-term trader, but it can be no less thorough. After all, it might be a two week investment, but it is still your money.And you cannot be too careful with your money! See our trading products to find out how we can help you protect it through smart trading strategies.