Position Trading vs. Swing Trading

By: Ryan Cockerham | Reviewed by: Ashley Donohoe, MBA | Updated March 31, 2019

In the world of investing today, a variety of strategies and tactics have been implemented into the toolkit of the modern investor. Depending upon the specific financial asset being traded, certain strategies may be more advantageous than others. Both position trading and swing trading are popular market tactics that allow investors to take advantage of various scenarios within the marketplace. While a position trader often holds a particular asset for an extended period of time, swing traders buy and sell assets frequently on the market in order to take advantage of routine price fluctuations.

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The primary difference between position trading and swing trading is the amount of time involved between buying an asset and selling it. Whereas position traders hold assets for long periods of time, such as months or years, swing traders will buy and sell assets within days.

Understanding the Swing Trading Definition

Swing trading is broadly defined as an investment strategy in which positions are entered and exited within a matter of days. Generally speaking, swing trading is a slower trading strategy than day trading, in which assets are bought and sold within hours.

As part of the investment strategy, swing traders actively seek out peaks and troughs in the price of a particular asset. This information helps create predictions regarding future price motion that the swing trader can use to generate profit. Although there is no assurance, of course, that past actions will be reflected in future trading, swing traders leverage a trove of historical data alongside current activity to determine what their best course of action will be.

Swing trading is most effective when the market is effectively sedentary. It is during these periods where market prices will typically rise and fall in repeating wave-like patterns rather than establishing a long-term bullish or bearish trend. When the market does enter bearish or bullish patterns, the effectiveness of swing trading diminishes considerably. This is primarily due to the fact that pronounced movement in a single direction can offset the type of "swinging" behavior found in less active trading periods.

Exploring Position Trading

Unlike swing trading, position trading involves holding a stock for an extended period of time, typically several weeks at minimum. A position trader generally does not let daily price motion or market news influence their trading strategies. Instead, they are focused on long-term outcomes and allow their particular holdings to fluctuate in sync with general market trends over the short-term.

On a fundamental level, position traders rely on general market trends and long-term historical patterns to pick stocks which they believe will grow significantly over the long term. Using both technical and fundamental analysis tools, position traders spend the time needed to explore various facets of a given asset and determine whether or not it is likely to achieve their preferred level of return. Some of the more common analytical tools used by position traders include the 200-day moving average and other long-term trend markers.

Expectations and Trading Style Preferences

For many investors, a decision to adopt a specific trading style is made with their short- and long-term goals in mind. For example, if a trader is anticipating volatile price action in a given asset over the next week, they are more likely to adopt a short-term position in the stock rather than a long-term.

Investors who are seeking to establish a viable "nest egg" for their retirement years will most likely explore various position trading options rather than swing trading. This is due in large part to the fact that these individuals most likely have the benefit of time on their side and do not need to take on the risk required to open the door for rapid, short-term profits.

For those individuals who are keen on making a living as a professional trader, swing trading and day trading are far more viable options than position trading. This is due to the fact that most position trading involves very few actual trades being made, while swing trading and day trading require investors to take a far more active role in the process.

Identifying Market Climate

Before you initiate a trade, you should be very aware of which specific trading strategy you plan on using with that particular asset. For example, if you have decided to purchase 100 shares of stock "X," you should already have a fairly good idea as to whether or not you will hold the stock for hours, days, months or years. Although it is perfectly reasonable to change your mind with respect to your strategy over time, deliberately avoiding considering your options will increase the likelihood that you will lose money over time rather than profit from your investment.

For many investors, the first consideration when choosing to purchase a stock should be whether or not the market as a whole is displaying bullish or bearish trends. If the market has entered a full-blown "bull run," you should weigh your options carefully before entering a long-term position. This is due to the fact that the market will likely experience a correction at some point following the end of the bullish trend. This correction could dissolve the profits you made when you purchased your stock, particularly if the price point at which you acquired the asset was well over its correct valuation.

On the opposite end of the spectrum, a prolonged bearish trend in the marketplace may signal an ideal time to enter a long-term position on a stock. Of course, the decision to enter a position following a bearish trend will primarily be based on whether not the trader believes the bear market has ended and further losses will not follow. Decisions such as these will have a significant impact on the potential profit awaiting a trader, as failure to appropriately read available analysis correctly could create significant losses. As always, it is critical that traders complete as much research and analysis as possible in order to determine whether or not a particular trade does match their investment goals.

Moving Forward With Your Trades

If you have been asking yourself, "Which is the best investment for long-term trading?" the frustrating truth is that there simply is no "right" answer to this question. Given the relative unpredictability of the marketplace, there is always an element of risk involved in all trades, regardless of how much of a "sure bet" they may initially seem.

With that in mind, it is highly recommended that novice traders avoid adopting any trading positions without first consulting any of the wide-ranging educational resources online or enlisting the services of an investment adviser. Many of the online brokerages operating today provide consulting services to traders.

This knowledge platform may be essential for newly minted investors seeking to establish themselves in today's dynamic marketplace. Regardless of which strategies are used, it is always important to remember not to invest more funds than you can afford to lose, as all investing carries some degree of risk.

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About the Author

Ryan Cockerham is a nationally recognized author specializing in all things business and finance. His work has served the business, nonprofit and political community. Ryan's work has been featured on PocketSense, Zacks Investment Research, SFGate Home Guides, Bloomberg, HuffPost and more.

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