Swing Trading For Dummies

Omar Bassal

• Éditeur: For Dummies
• Année: 2019
• ISBN:
  9781119565116
• Édition: 2
• Sujet: Business
• Sous-sujet: Stocks

Increase profit and limit risk with swing trading basics

Swing trading is all about riding the momentum of brief price changes in trending stocks. Although it can be risky, swing trading is popular for a reason, and Swing Trading For Dummies, 2nd Edition, will show you how to manage the risk and navigate the latest markets to succeed at this lucrative trading strategy.

In this updated edition, you'll find expert guidance on new accounting rules, the 2018 tax law, trading in international markets, algorithmic trading, and more. Plus, learn about the role social media now plays in moving asset prices, and how you can tap into online trends to ride price swings.

• Understand money management, journal keeping, and strategy planning
• Focus on fundamental analysis to increase your chance of success
• Evaluate companies to screen for under- or overvalued stocks
• Develop and implement your trading plan and calculate performance

Starting from the basic differences between swing trading and other trading styles and progressing through plain-English explanations of more advanced topics like charts and reporting standards, Swing Trading For Dummies will help you maintain and grow your assets with swing trading in any market!

Part 1

Getting into the Swing of Things

IN THIS PART …

Figure out how best you can use swing trading — depending on your goals and time commitment.

Determine the what you’ll swing trade (probably equities), where you’ll swing trade (domestically or internationally), when you’ll swing trade (during the market or using end of day data), and how you’ll swing trade (will you strictly use charts, base your decisions on fundamentals or a combination of the two?)

Find out about the rules of the swing trading game so you can produce consistent returns and avoid a loss that wipes out your portfolio.

Understand the steps you need to take to set up your trading account, subscribe to the reputable service providers, and keep a trading journal.

Discover some recommended strategies for growing your portfolio into a swing trading success story.

Chapter 1

Swing Trading from A to Z

IN THIS CHAPTER

Contrasting swing trading with other types of trading

Deciding how much time you want to devote to swing trading

Getting strategic by preparing your trading plan

Avoiding the mistakes that many swing traders make

You can earn a living in this world in many different ways. The most common way is by mastering some skill — such as drugs in the case of pharmacists or coding for web developers — and exchanging your time for money. The more skilled you are, the higher your compensation. The upside of mastering a skill is clear: You’re relatively safe with regard to income. Of course, there are no guarantees. Your skill may become outdated (there aren’t many horse carriage manufacturers operating today), or your job may be shipped overseas. You also have a maximum earning potential given the maximum hours you can work without exhausting yourself.

But there’s another way to make a living. Swing trading offers you the prospect of earning income based not on the hours you put in but on the quality of your trades. The better you are at trading, the higher your potential profits. Swing trading takes advantage of short-term price movements and seeks to earn a healthy return on money over a short time period.

Swing trading is a good fit for a minority of the population. It involves tremendous amounts of responsibility. You must rely on yourself and can’t be reckless or prone to gambling. If you’re not disciplined, you may end up with no income (or worse).

This chapter is an overview to this book and your guide if you’re interested in swing trading.

Understanding What Swing Trading Is (and Isn’t)

Swing trading is the art and science of profiting from securities’ short-term price movements spanning a few days to a few weeks. Swing traders can be individuals or institutions. They’re rarely 100 percent invested in the market at any time. Rather, they wait for low-risk opportunities and attempt to take the lion’s share of a significant move. Generally, large institutional investors (think of a pension plan or a sovereign wealth fund) can’t swing trade because their size prohibits them from easily moving into and out of a position. Smaller traders, however, can profit from these short-term movements because their size allows them easier entry and exit from liquid positions.

Swing trading is different from day trading or buy-and-hold investing. Those types of investors approach the markets differently, trade at different frequencies, and pay attention to different data sources. You must understand these differences so you don’t focus on aspects that are only relevant to long-term investors.

UNCLE SAM DIFFERENTIATES BETWEEN TRADING TIME FRAMES

What would a discussion of swing trading be without mentioning our good old friend Uncle Sam? He has a say in your profits and losses because you presumably pay taxes. And he treats profits and losses differently depending on whether you’re a day/swing trader or the buy-and-hold variety.

The factor that determines how you’re taxed is based on your holding period. If you hold a position for 366 days (one year and one day) and then sell it, any profits from that position are taxed at a lower rate — called the long-term capital gains tax rate — than your ordinary income tax rate (which can be as high as 37 percent in 2019). In 2019, the long-term capital gains tax rate ranged between 0 percent and 20 percent (depending on the size of the capital gains). However, this rate can change due to tax law changes.

Swing traders, of course, are unlikely to qualify for this lower tax rate on positions. Holding periods for swing traders are measured in days, not years. Short-term profits are likely to be taxed at an individual’s ordinary income tax rate — called the short-term capital gains tax rate.

But there’s an exception. The government provides special tax treatment to people it considers pattern day traders. Pattern day traders must trade four or more round-trip day trades in five consecutive business days, and those trades must be more than 6 percent of your total trading activity during that same five-day period (in other words, those four or more round-trip trades can’t be for small values just to qualify for the special tax treatment). Pattern day traders must also maintain a brokerage account with at least $25,000 worth of equity (cash and stock). You can read more about the requirements of pattern day traders from the Financial Industry Regulatory Authority’s website at www.finra.org/investors/day-trading-margin-requirements-know-rules.

So why is qualifying as a pattern day trader so special? The major benefits are as follows:

• You can deduct your trading expenses, such as research subscriptions, home office expenses, start-up expenses, trading books expenses (ahem), on Schedule C of your tax return, which reduces your adjusted gross income. Normally, you would report these expenses on Schedule A where you can only write off expenses that exceed 2 percent of your adjusted gross income.
• You’ll be exempt from the wash sale rule. No, this isn’t a rule on how you do your laundry. Instead, the IRS doesn’t allow most taxpayers to write off a loss on a security if that taxpayer buys back the same security sold for a loss within 30 days. But pattern day traders are exempt from the wash sale rule. Therefore, they can still write off any losses on securities regardless if they buy the same security back within 30 days.
• You can deduct an unlimited amount of losses from your income. Most taxpayers would treat gains or losses from trading in securities as capital gains and losses; there are limits to how much taxpayers can reduce their taxable income from such losses (if they exceed the capital gains). The pattern day trader, however, can treat all gains and losses from security trading as ordinary income and losses. This means if you’re having a tough year with significant trading losses and you qualify as a pattern day trader, you can deduct these losses from your income and significantly reduce or eliminate your taxes for that year.

A swing trader who trades part time may have difficulty convincing the IRS that she is a pattern day trader. But if you’re a full-time swing trader, you should be able to take advantage of the special treatment of pattern day traders. Otherwise, expect to pay taxes on profits at your ordinary income tax rate (unless you sell securities after holding them for 366 days or longer, which isn’t a typical swing trader).

However, swing trading in tax-deferred accounts — like in an Individual Retirement Account (IRA) or a 401(k) Plan — takes care of the tax issue. Taxes on gains and profits in such accounts aren’t paid until the account holder withdraws the assets (usually at retirement). Because taxes change often and depend on an individual’s situation, I strongly recommend consulting an accountant or tax professional to understand how swing trading will affect your taxes.

The differences between swing trading and buy-and-hold investing

If you’re a buy-and-hold investor in the mold of Warren Buffett, you care little for price swings. Over the long term, equity indexes have tended to rise across countries. Therefore, you prefer to buy quality businesses at discounts to their intrinsic value (also known as their true worth). You pore over financial statements and read the notes to the financial statements. You read through earnings call transcripts (the management presentations given after quarterly earnings results). Short-term price movements are merely opportunities to pick up securities (or exit them) at prices not reflective of their true value. In fact, buy-and-hold investors tend to have a portfolio turnover rate (the rate at which their entire portfolio is bought and sold in a year) below 25 percent — meaning they turn over their portfolio once very four years.

Buy-and-hold investing is an admirable practice, and many investors should follow this approach, because it’s not as time-intensive as swing trading and not as difficult (in my opinion). But if you have the work ethic, discipline, and interest in swing trading, you can take advantage of its opportunities to achieve the following:

• Generate an income stream: Buy-and-hold investors are generally concerned with wealth preservation and growth. They don’t invest for current income because they sometimes have to wait a long time for an idea to prove correct. Swing trading, on the other hand, can lead to current income.
• Time your buys and sells and hold a basket of positions to diversify your risk: The majority of people aren’t interested in closely following their finances and are best served by investing in a basket of domestic and international mutual funds covering stocks, commodities, and other asset classes. Swing traders can hold a few securities across asset classes or sectors and generate higher profits than those who invest passively.
• Achieve lower drawdowns than buy-and-hold investing: Sometimes markets become overvalued. Just because a market is expensive doesn’t mean it will tank. Markets often go from being overvalued to even more overvalued. This inevitably sets the stage for a major market crash (think 2000 or 2008). During market crashes, buy-and-hold investors can experience drawdown...