There are many different ways to play the financial markets. Swing trading is when you would hold an asset for a little longer than a day, but less than long-term investing which involves holding an asset for longer durations. Which method is preferable depends largely on myriad variables including such things as tolerance to risk. If you are a conservative investor and have the luxury of time on you side, it may be preferable to hold onto an investment for years, if not decades, to maximize profit while minimizing risk. If you are a more experienced investor and enjoy the thrill of the game as much as making money, swing trading may be more your speed. This article will explore the pros and cons of each of these investing styles in order for the trader/investor to discover which strategy is best for them.
Swing Trading
As mentioned above, swing trading involves holding an asset for several days hoping to capitalize on short-term price fluctuations. A swing trader, unlike a day trader, does not trade all day, but he or she trades much more frequently than a long-term investing which requires less active participation and more patience.
Pros
• Faster Profits – Because trades are entered and exited in relatively quick durations, a swing trader will experience realized profit (or loss) faster than a long term investor.
• More Thrill – Long-term investing requires a great deal of time. Such stretches hardly result in those edge of your seat moments when an asset will jump or fall in price suddenly. Swing traders enjoy this thrill. Investor’s tend to find it nerve racking.
Cons
• More Monitoring Required – Swing traders need to play a more active role in open positions as short term fluctuations can occur at any time.
• Risk of Substantial Losses – As with any style of trading, swing trading can be risky. In fact, the shorter the time frame, the riskier the trade as the asset has less time to recover its losses.
Long-term Investing
Long-term investing involves ignoring daily, weekly and even monthly fluctuations. In theory, a long-term investor may hold an asset for an entire lifetime. Most investors, however, tend to hold for a matter of years, in some cases even decades. In this way, they ride out the losses for the sake of what they believe will result in safer, longer-term gains.
Pros
• Less Active Participation – A long-term investor is, as the title implies, in it for the long haul. As a result, there is little need for an investor of this type to frequently monitor their positions. Once every few weeks is generally all all the monitoring that is required.
• Less Risk – As a general rule, longer-term investments tend to do well over long time frames. They accomplish this by not panicking or succumbing to greed. A long-term investor rides out the times of turbulence and is generally rewarded with a profitable asset in the future.
Cons
• Time, Time, Time – Long-term investing requires patience and faith. It also requires your capital be tied up for the duration of the investment which means the money can not be used for other purposes.
• Boring – Many traders consider long-term investing to be rather boring. Your money is tied up for years and years regardless of market swings.
As you have noticed, the biggest difference between swing trading and long-term investing is the time committed. Because swing trades are for shorter durations, they require more active participation and more exposure to risk. Profits derive from these short-terms swings in the market. Long-term investing involves many years and, therefore, is less prone to the daily volatility associated with swing trading. Long-term investment also requires less active participation, as a result of such commitment. Profits come slow and steady as opposed to in rapid bursts more susceptible to risk.
Many savvy investors utilize a mix of both long-term investing and swing trading depending on circumstance. In this way, they get the safety of the slower returns with the thrill of the quicker profit. Regardless of which strategy you use, trading and investing in the financial markets requires due diligence in the form of planning and research. Find the investment strategy that works best for your goals and tolerance level. Never trade more than you can afford to lose. The markets are filled with seasoned professionals who make their money off of those who do not have a tested strategy in which to trade or invest. Whether you decide to experience the thrill of swing trading, or the rich rewards of long-term investing, do your homework and always enter the market prepared.