Picture this. You invest in a stock and it appreciates by 15-20% in just a few weeks. You exit the stock to enter a new stock with the same strategy to make good profits in just a few weeks.
Welcome to the world of swing trading.
While theoretically swing trading offers those looking for making quick gains from stock market investments a practical option, in reality there may be very few investors who are actually able to gain from it.
When Mumbai-based investor, Sohail first heard of swing trading he became very excited. After severe losses in intraday trading, he finally thought he had discovered the perfect strategy to recover all his losses.
However, several weeks later he found himself back at square one as none of his swing trading strategies had worked as per his expectations or even recover his losses.
In this article, let’s take a look at:
What is swing trading and whether swing trading is profitable?
Swing trading refers to a style of trading in which a trader attempts to capitalize on the short- to medium-term gains in a stock over a duration of few days to several weeks. Swing traders primarily use technical analysis and at times fundamental analysis or a combination of both to look for trading opportunities.
Drawbacks of swing trading
Since the duration of investing is short any profit that arises out of swing trading is taxable at a higher rate due to Short Term Capital Gains (STCG). On the other hand, investments for the long term are taxed at a lower rate due to Long Term Capital Gains (LTCG).
Low profits, high risk
In the short-term markets are highly unstable. Any uncertain or unpredictable event may affect the stock prices of a company or the stock market in short term. Sometimes there may be nothing wrong with a stock, but it may still correct as a part of an overall market correction. Some examples of such events include the market correction due to the NBFC crisis in 2018, USA-China trade wars in 2019, the onslaught of the Covid-19 pandemic in March 2020, etc. which caught swing traders unaware who ultimately ended up with huge losses.
Risk of missing out on long term trends
As swing traders chase short-term profits, they tend to miss out on long-term trends. A stock that is on an up move may have further upside over the long term which swing traders miss out on as they restrict themselves to making small amounts of profits in a short duration.
Higher brokerage and other charges
Swing trading involves buying stocks and selling them after a few days or weeks. Frequent buying and selling involve higher brokerage costs, Security Transaction Tax (STT), GST, and other charges. All these added transaction costs may reduce the overall profit generated from swing trading. Many investors often make the vital mistake of overlooking these charges and focus only on the gains made from each trade without realizing that these frequent charges are eating away a lot of their profits.
Swing trading cannot create sustainable wealth
Swing traders aim to generate small profits consistently by indulging in frequent buying and selling of stocks over a duration ranging from few days to few weeks. However, due to high market volatility, not all trades turn out to be profitable. There is always a risk of one unfavorable trade wiping out the gains of all previous trades, just as in the case of intraday trading. Hence swing trading can never create sustainable wealth.
Bottom line: Is swing trading profitable?
Swing trading can be profitable if one can predict the movement of markets and stocks accurately from time to time. However, given the numerous factors affecting stock prices and stock markets and the associated market volatility even the most experienced investors can go wrong with their stock market predictions at times. In theory swing trading appears to be very easy and highly profitable, but in reality very few people are able to achieve success with this strategy consistently.
High taxes, brokerage, and other charges reduce the overall profits generated by a trader from swing trading. Most importantly as we have seen above swing trading can never create sustainable wealth for investors. On the contrary fundamental investing for the long term is a proven way to create huge wealth. Many investors who have taken this approach have created unparalleled wealth over the long run.
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