Is Swing Trading Profitable? Top 5 Factors of Making a Living as Swing Trader

Last Updated July 23rd 2021
7 Min Read

Trading is inherently risky. There is no guarantee that the moves you make in the market will bring you profits. However, if you spend time understanding the market and its behaviour, then it is possible to make profitable trades. Taking well-informed decisions and calculated risks often results in a profitable trade.

Swing trading is often considered suitable for making profits. But, if you enter swing trade unprepared, you are likely to end up with losses. The good news is, with ample preparation, it is possible to gain profits from swing trade.

What is swing trading?

Before we discuss if swing trade is profitable, let us take a quick look at swing trading. It is one of the common ways traders use to avoid the FINRA restrictions. It is a type of trading that seeks to secure short- to medium-time gains in a stock over a few days or in some cases, even several weeks. Swing traders generally use technical analysis to find optimum trading opportunities. However, it is better to use fundamental analysis besides analysing the price trends and patterns.

Essentially, swing trading is a short-term trading strategy where you hold stocks overnight primarily to avoid the PDT rules. However, swing traders try to profit from high volume swings such as short squeezes or earnings beats. Although it is a good option to avoid the PDT tag, swing trading is replete with risk as the traders are exposed to extremely volatile moves by overnight holdings. But, if using options, the chances of earning profits are extremely high, and hence it is an attractive option.

Read More: Complete Swing Trading Guide

Is swing trading profitable?

At the outset, we can say that swing trading is profitable. It is possible to beat the market and earn profits over a long period. However, it is not easy – it requires discipline, coupled with a good strategy and a great understanding of the market. It is not a way to get super rich quickly. If you are looking at swing trading as a shortcut to getting rich, you are mistaken. You are more likely to suffer huge losses if you enter the market unprepared.

Profit determinants

Let us look at what determines how much money you can make from swing trading as well as what you should focus on to make the trade profitable.  

  • The trading strategy
  • Opportunity
  • Position size
  • Transactional Costs
  • Big picture

Trading Strategy

This is one of the key determinants of how much money you can make in swing trading. It is quite logical that a good strategy is more likely to earn you a lot of profits than a bad one. So, the first step towards a profitable swing trading career is developing a strategy that works. Don’t just get into the trade blindly. Make sure you have something that works by having a verified strategy based on historical data. Building a strong strategy based on data is fundamental to your success in swing trading. Without a solid strategy, you cannot hope to make profits out of the trade.

Opportunity

Having a strategy in place serves no purpose if you don’t use it to spot opportunities. Opportunity can be described as the number of times your strategy offers a signal to buy.

The number of signals is not decided just by the strategy, but also by the number of markets you trade with that strategy. So, you must be alert for spotting the opportunities and acting on them.

You will receive a lot of signals to choose from and you can choose trades that offer higher returns. Swing trading also makes sure that your capital doesn’t sit idle for long periods.

Position size

This one is quite straightforward in the sense that the higher the risk, the larger the profit. In other words, the more money you put in, the more profits you’ll make or higher the loss on each trade you undertake.

However, it is important to note that the size of your trades should not be the determinant of your income, but how much you can afford to risk. Trading is like a marathon – you will have to play it for longer if you wish to make profits from it. And whatever you do, never risk your capital to such an extent that you are unable to trade tomorrow.

The ideal amount is 2% or less of your account balance on one trade. It will ensure continuity of trade, even if you suffer some losses in the process.

Transactional costs

Keeping costs low is one of the easiest ways to increase profits. It is crucial to keep the costs low if you wish your account to grow as fast as possible. Keep an eye on the transactional costs, no matter how little they might seem.

Even a few dollars could add over into a massive amount over time. You should keep an eye on the commissions and other expenses, however small they might be, and keep them to the barest minimum.

One of the ways to keep the transactional costs low is to try to trade with high volume. If so, you’ll incur less slippage and hence low impact on your trading performance.

Keep the big picture in mind

Even though swing trading is a type of short-term trading, you should never lose the big picture while trading. As such you should look at both macro and micro environments.

A short look-back period can be deceptive and costly while trading. Use a two-year weekly chart of stock to get the bigger picture. That will help you determine the overall trend and examine the stocks with the long-term average move. Once you do that, focus on the six-month daily chart to examine the finer details.

You’ll discover several details that the weekly charts conceal. You can ascertain a stock's short-term trend this way. Finally, scrutinise the hourly chart to reveal the general trend over the last couple of weeks. The moving averages can be extremely helpful.

Check Out: What are the Pros and Cons of Swing Trading?

How much money can you make from swing trading?

By now, you would have understood that it is possible to earn handsome rewards in swing trading. However, the general question that needs to be answered is how much money I can make from the swing trading.

Overall, it is realistic to say that you can expect to earn a return from swing trading ranging from 10 to 30% in the long run. Of course, this largely depends on your strategy and how effectively you use the signals to trade. Don’t expect the gains to occur every time you trade. It will be spread over a period.

Even if you suffer some losses in between, with the right strategy and opportunity you can earn a reasonable return from swing trading.

Do swing traders beat the market?

Swing traders can do beat the market. If you can identify the trade entry and exit points, you can beat the market too.  

There are several strategies you can use to swing-trade. You must know the trade entry point, exit level, and stop loss. Any successful swing trading system must include these three key elements.

Here are some swing trading strategies you can use to beat the market:

Fibonacci retracement

It is used to identify support and resistance levels, and possible reversal levels on stock charts. Plotting horizontal lines at the classic Fibonacci ratios of 23.6%, 38.2% and 61.8% on a stock chart can reveal potential reversal levels.

Support and resistance triggers

These represent the cornerstone of technical analysis enabling you to build a successful swing trading strategy around them. A support level suggests a price level or area on the chart below the current market price where buying is strong enough to overcome selling pressure.

Channel trading

This strategy requires identifying a stock that displays a strong trend and trades within a channel. However, while using channels to swing-trade stocks, you should trade with the trend.

10 and 20-day SMA

This is another popular swing trading technique involving the use of simple moving averages or SMAs. They smooth out price data by determining a continuously updating average price that can be taken over a particular range of time.

MACD crossover

This strategy provides a simple way to identify opportunities to swing-trade. It consists of two moving averages – the MACD line and signal line. The buy and sell signals are created when these two lines cross.

Don't Miss: How Much Money do you Need to Swing Trade Stocks?

Conclusion

The above strategies and determinants will help you in swing trading and earn a profit. All these measures help you to identify trading opportunities in the markets you're most interested in. By analysing and incorporating these swing trading tips and tricks into your existing trading framework, you can gain a better understanding of how to trade successfully.

The bottom line is that it is perfectly possible to earn profits in swing trade and even make a living out of it. However, it is not something to be entered lightly into. You must be prepared to play the game long-term to reap the benefits.

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