What is a significant risk associated with swing trading?

Swing trading involves taking advantage of price movements in securities over a short to medium time frame, typically from a few days to several weeks. A significant risk associated with this strategy is the occurrence of overnight price gaps and volatility. These gaps can arise due to various factors, such as earnings reports, economic data releases, or geopolitical events that happen after the market closes.

When the market opens the next day, the price of the security may jump significantly higher or lower than its previous closing price, leading to unexpected losses or gains. This unpredictability can impact a swing trader's ability to manage positions effectively and is particularly concerning since swing traders often hold positions overnight, exposing them to the risk of substantial moves that can damage their trading strategy and lead to unforeseen losses.

Understanding this risk helps traders manage their strategies by placing stop-loss orders or opting to minimize their exposure during particularly volatile periods, thus allowing for more controlled risk management.