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Daily Stock Tips Free Report:  The Really Big Advantages of Swing Trading versus Buy and Hold

Unless you have been living under a rock these past 10 years or so, you know that times are changing at a faster pace today than ever before in history. Though personal computers have really only been in widespread use for the past 15 years, it is hard to imagine a business, big or small, that does not rely on computers for accounting, inventory, sales and marketing and virtually every other aspect of business. A little over ten years ago the Internet was but a vague dream accessible only to the cognoscenti in the computer world.

There have been more technological advances in the last 100 years (and even the last 50 years if you really think about it) than in all the thousands of years of prior history. Many of you grew up in homes with outdoor plumbing, only occasional hot water, unreliable electricity, no air conditioning, no televisions, with radio being the hottest thing going, and no one believing that "talkies" would ever last. At the time you didn’t realize how just how deprived you were! Our lifestyles have changed so dramatically that few of us ever take the time to reflect on how far we’ve come in such a short time.

Yet despite all these advances and the almost daily rush of changes (many experts think that the single greatest change that the technological revolution ushered in is the ability of the average Joe and Mary to access information that was previously available only to the rich and the powerful) there are many investment advisors who tell their clients that the best strategy for investing in stocks is to "buy and hold." They argue that you should buy stock in good solid "can’t miss" companies, then simply hold that stock until you retire, when you can cash in your accumulated riches. Keep in mind this group was recommending such "can’t miss" stocks as Polaroid, Studebaker, U.S. Sugar, Western Union, Central Leather, Woolworth, Nash Motors, and many other former components of the Dow Jones Industrial Average over the years.

But if you really want to understand how this mythology still manages to dominate the investment scene, "follow the money." The strongest advocates of buy and hold are the huge mutual funds. They want you to put your hard earned dollars into their funds so they can earn average returns for you while taking their healthy fees out along the way. After all, it is the fund managers and promoters who have the yachts. Haven’t you ever wondered where are their customers’ yachts?

Let’s take a look at just one representative example. We could pick one of the high flying highly volatile technology stocks of recent years and show you how much money could be made "swing" or intermediate term trading. But picking the best case scenario does not really teach anything.

We’ll take a look at one of the stodgy blue chip stocks in the Dow Jones Industrial Average. Dupont (DD) is the well known huge international chemical company and is considered one of the bluest of blue chip stocks, a stable company and a stable stock suitable for buy and hold from even the most skeptical.

You could have purchased Dupont (DD) on June 30, 2003 at $41.64 per share. If you held it for a year, you would have sold it on June 29, 2004 at $44.15. That would have been a gain of $2.51 per share, or a return for the 12 months of about 6%. Add to that the 3.2% dividend paid by DD over a year, you would have made about 9.2%. Compounding (reinvesting your profits and dividends) you could double your money about every 8 years at that rate. Not too shabby, till you consider a conservative, easy to understand and implement swing trading strategy.

The numbers below represent realistic potential swing profits, trading just this one, hardly ideal candidate, using a few easily recognized timing signals (reversals, outside days, and 3 day highs). Note that we are illustrating this with closing prices only. The profits would have been much greater if we used daily highs or lows, or even average daily prices.

Using only timing signals, without reference to other key indictors such as volume or moving averages, a reasonably attentive trader could have done the following:

In other words, using a conservative easy to implement swing trading strategy that used only closing prices for both buying and selling, you would have made OVER 7 TIMES more money than using the buy and hold strategy for the same stock.

But of course that is not the whole story. When you swing trade, your costs will go up because you incur more commissions. In the old days when commissions were fixed by the New York Stock Exchange, this simple swing trading strategy would have only been marginally more profitable than the buy and hold. But fixed commissions went the way of the horse and buggy over 20 years ago.

One widely advertised quality brokerage firm (Scottrade) charges only $7 per trade (with certain limitations). If you paid $7 for each of those 13 trades, your profit would have been reduced $91 (assuming you traded 100 shares each time). So instead of making $1,827 for trading 100 shares on each signal, you would have made only $1,736, still nearly 7 TIMES more money than what the buy and hold strategy earned.

The buy and hold returned about 6% (or 9.2% including dividends). The swing trading strategy returned nearly 42% AFTER commissions. At 42% per year if you re-invested your profits and dividends, you would double your money every 1.7 years.

And remember, the returns would have been much higher if we would have selected a volatile good quality high technology stock, or if we would have sold short on short selling signals as well as taking the buy signals, or if we employed entry techniques to get better buy and sell prices than simply using the closing price each time. The swings are greater for over-the-counter NASDAQ stocks than for a stodgy old component of the Dow Jones Industrial Average like Dupont.

But that is the whole point of this exercise. If you can earn many times more swing trading a blue chip slow moving stock than simply buying and holding, imagine the potential returns that the same disciplined strategy could earn in more volatile stocks.

Buy and hold is a strategy designed to line the pockets of big money managers while earning "average" returns for their clients. If an "average" return is all you want, maybe buy and hold if for you. But for traders willing to invest a little time with a small effort the potential to earn profits many times greater than "average" is a very real possibility.

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