There are many ways to make money in the stock market. While some investors like to study the underlying value of a company, its ability to profit, and the growth potential of its products and industry, others simply want to capitalize on price fluctuations in the market. These investors are called swing traders.

How swing trading works

Swing traders have methods to analyze stock movement. Many traders study charts and trends and develop an idea of what the support and resistance for stocks are. Stocks may seem as if they fluctuate wildly, without rhyme or reason, but there is an underlying supply-and-demand process at work. The support level of a stock is the low price point at which investors generally recognize the stock as a good value and decide to buy, pushing up the price. A stock’s resistance is the high point at which investors will generally see a stock as overweight in price and will begin to sell, pushing down the price.

Between recognizing the support and resistance and identifying trends, swing traders can develop a set of parameters for positions that indicate when to purchase a stock because they think that the price will rise within a short period of time, allowing them to sell for a profit after holding the stock for only a few days.

What it takes to be a swing trader

First, you must have a brokerage account in order to buy and sell the stocks you plan to trade. Because the majority of your trading will be short term, you will likely have a high volume of trades, so look for a brokerage account that has low commissions and discounts.

Next, you need liquid capital in order to make the trades. If your financial institution approves it, you may be able to trade on margin, but you could face margin calls if the values of your other securities fall.

They keys to success

As with any type of investing, the goal is to buy low and sell high. As a swing trader you have a short window of time to capitalize on the current and future movement as you interpret it. In order to be successful at swing trading, you need to be able to accurately spot trends in individual stock prices and must be available during trading hours to watch price fluctuations. The goal is to have at least a rough idea of when the price will change favorably.

Tax consequences

Swing trading generally exposes a trader to short-term capital gains taxes. This needs to be considered before you decide when to sell your positions. Should you be wrong about the movement of a stock and realize a loss upon sale, you may be able to write off the loss. However, the wash sale rules will apply if you buy the same (or a substantially similar) position in the 30 days before or after the sale.

If you want to understand this or any other aspect of a brokerage account, stop by to discuss your options with one of our investing professionals.

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