Invest While Trading

It’s time to talk about swing trading.

Mar 20, 2024

Hello friends and enthusiasts! 👋

Many of you are probably familiar with investing. Some of you are probably familiar with trading. But there is an investing strategy that blurs the line between both of these familiarities.

It’s time to talk about swing trading.

Invest While Trading

Hey ChatGPT, what is a short and simple definition of swing trading?

“Swing trading is a trading strategy where traders aim to profit from short-to medium-term price movements in financial markets, typically holding positions for a few days to several weeks or months. The goal is to capture "swings" or fluctuations in asset prices, buying low and selling high and vice versa.”

That should give most of you an idea of things, but for me, I like to think of it as ‘investing while trading.’

Take Apple for example. In this scenario, let’s imagine the market overreacted to earnings, causing their share price to drop 15% from $193 to $165. That’s great news for us long-term investors since we just caught a great value on an amazing stock. Plus, we inherently know (even if no one can predict the market) that whether it's weeks or months, the stock will most likely rise back up again, giving us a nice return.

However, there is one problem—we believe in the company long-term, but we don’t want to hold it for the long-term. In this case, what would you do? Throw away the chance for a “guaranteed” 15% return? Or do you buy in?

Enter, swing trading.

If you were to swing trade in this case, you would buy a comfortable amount of Apple and wait until the market corrects to the original price it was, and then sell. This is why I call it ‘investing while trading.’ You are investing since you believe in the company long-term, but you are also trading because you have a plan to buy it at a price and sell off at another price in a specific period of time.

In today’s Deep Dive, we’ll be covering swing trading, what it consists of, what you should know if you plan on using it, as well as the dangers of switching investment strategies. (PS: This issue will not teach you how to become a master swing trader; it will instead be a guide for understanding how it works.)

Throughout two sections:

Spotting a Trade
Sticking to a Strategy

Today’s a short one, so let’s get into it.

1. Spotting a Trade

To understand, let’s look at the basics. Think of the concept of trading as a roller coaster going up and down 100 hills at 100 km/hr. As a day trader, you are trying to buy at the bottom of the hill and predict when the roller coaster will hit the top of the hill. When it hits the top, you sell (or vice versa in some cases).

Swing trading is based on the concept of day trading; however, it is not entirely distinguishable from it. Instead of timing when the stock will go up and down in a single day, you are doing so over a period of days, weeks, or even a few months. It’s less risky and is technically more profitable than day trading if done correctly.

Let’s take Hershey, for instance.

Above is the 5-year performance of Hershey. One major aspect we can notice about this graph is the massive 34% dip from the high in May 2023 to December 2023.

As a swing trader, or if someone were looking to swing trade, this looks like an amazing trade, doesn’t it? If the stock breaks out of the correction and rises back up, we could pocket a 34% return, right?

Except, that would not be swing trading.

Let’s look closer at that graph.

This is the 6-month graph of Hershey.

If you were to start your trade in September, Hershey would have dropped another 5%. That’s six months ago, and you would have lost money on your trade.

Not only is six months extremely long for a swing trade, but it would not have given you the 34% return you were hoping for. If you were to hold between Dec 2023 through Feb 2024 though, you would have made around 13%. That would be a successful 2-month swing trade. Even though the stock lost 5% in the past six months, you would have made 13% in two.

In short, if you are going to swing trade, you need to locate a noticeable dip of a stock and have past performance to help ‘guarantee’ the trade to be successful. If a stock dips 5% or 10%, there is a high chance it will probably go back up if that same stock has already hit that price before.

In this case, including when it comes to swing trading, you should try not to assume the biggest return, and you should never look at a long-term graph or anything more than 6 months. Remember—a swing trade is for the short term, so look at a short-term graph. In this case, a 10% return or even less is reasonable, but to rise back up 34% in the short term will take many months. (Something swing trading does not always allow.)

Keep in mind, out of all of the billionaires that gained wealth from the stock market, most of them weren’t traders. Trading is a world filled with prediction and gambling, and this type of playing with the stock market goes against every law of investing.

This brings us to the next section; sticking to a strategy.

2. Sticking to a Strategy

I am a firm believer in investing over trading. Maybe if you have a ton of money to play with, then you can try some side trading. Perhaps you see a great swing trade opportunity and you want to use those potential gains to create more cash that you can invest. These are both fine reasons to swing trade, and to each their own, but ultimately, sticking to one strategy will benefit you more.

I myself have learned the cons of jumping from investing to trying the strategy of ‘investing while trading,’ and it does not benefit you at all.

Let me show you something.

This is my current portfolio, and out of the 30-ish positions, around 10 of them are short-term holds, (meaning I plan on selling them off very soon). These holdings could potentially be called swing trades.

These 'swing trades' collectively take up over 14% of my portfolio, and more than half of them are in the red. All because I wanted 'quick money,' I went and bought these stocks.

I did not know anything about why they dropped; I just thought to myself: 'Oh, General Mills is down 30% this year, it should go back up if I hold it for a few months. That means if I buy it now, I’ll make a sweet return!'

Stocks do not always go up, and there is no such thing as 'quick money'; that’s always been true. There was a reason General Mills dropped, and the side effect of this one trade was a 2% return in 5 months and a dilution of my other holdings, which dragged my overall portfolio return from what could have been 23% down to 7%.

Don’t make this mistake. Don’t spread yourself too thin across numerous stocks, don’t gamble on price fluctuations, don’t chase after quick profits, and don’t compromise your overall returns.

You're either an investor or a trader. Choose one and stick with it; avoid jumping through hoops.

Here’s my take:

Investing in great businesses with strong fundamentals that compound over 5, 10, or even 20 years has always been a better proposition than trading. Even if you hold a trade for 1 year, you are not investing; it’s called speculation. As a trader you are betting on price movements, something not based on company fundamentals—something akin to gambling.

Be that as it may, by sticking to a strategy that has been guaranteed to make you money over hundreds of years, you will benefit immensely, and you will hopefully thank me later.