Am I losing money with swing trading?

Investing and managing my finances is one of my hobbies. And this year, markets seem to be pretty much in bubble territory due to AI.

So I am riding the waves of stock prices, and I am trying to rebalance my holdings and cashing in on some profits. But I want to also maximize those profits as much as I can, and to do that I am trying something new: Swing trading, which means selling high (obviously), but then to also buy the dip a few days later.

So the idea is that I end up with the same amount of shares, but I can pocket the difference of selling high and buying back low. But then reality in the form of taxes hits, and the amount of taxes I have to pay on profits can exceed the swing-trade difference.

Lets look at a small example, first without any swing trading: Assume that I have bought 10 shares for a price of 10€ each some years ago. Now they have bubbled up to 110€ in price. If I sold all of them today, my profit would be the difference between selling price today and the buying price I payed years ago. In this case the difference is 100€. That is the profit I have to tax, using the Austrian capital gains tax of 27,5%. So at the end of the day, after taxes, I would end up with 72,5€ of net profit, per share, for a total of 725€.

But those are all what ifs. The markets are volatile, and the bubble might burst any day. Maybe tomorrow the shares crash down to 20€, at which point my potential profit would only be 10€ per share before tax, for a total of 72,5€ after taxes.

Now lets look at a simple swing trading example. Again, we assume that I bought 10 shares for 10€ each. Today I am selling a small fraction of those shares (1 in this example) for 110€. Same math as before applies. I owe 27,5%, or 27,5€ in tax for that sell. Tomorrow the shares dip a little bit to 100€, and I buy the dip.

So I sold for 110€, then bought at 100€, pocketing the difference of 10€, right? Well, except I owe 27,5€ in taxes for the sell, which means factoring in those taxes, I effectively lost money with that swing trade, 17,5€ to be exact. Say what now?

The thing is that I am paying taxes forward. The buyback I did changes my average share price, which is considered for the next time I will sell. Different countries have different rules for this. In Austria, a buy maintains a weighted average. In our example, it means the following: I started off with 9 shares bought for 10€ each years ago for a total of 90€. Now I buy one more share for 100€, for a total of 190€ invested, or 19€ per share. That is my new weighted average.

Tomorrow the shares will climb to 110€ again. If I were to sell them all, my profit would then be 91€, and owing only 25,025€ in taxes per share. This would leave me with a total net profit of 749,75€. Factoring in the loss I made before on the swing trade, the total would be 732,25€.

Or in other words, 7,25€ more in this hypothetical example as if I didn’t do the swing trade.

Buy speaking of hypotheticals, what if the share price plummets to 20€ once again. If I were to sell all, due to the change in the weighted average, my profit would only be 1€ per share, for a total of 2,75€ owed in taxes.

So I sold all the shares for 200€ total, having payed 17,5€ up front, and 2,75€ for the final sell. Minus the initial investment of 100€ leaves me with a total net profit of 79,75€.

This is again 7,25€ higher than without the swing trade even in case the share completely tanks.

And those 7,25€ is by the way what remains of the 10€ in swing trade difference after taxes, which is true for all the swing trades.

# Conclusion

So, do I actually make a loss playing around with swing trading? Yes, but only short term. Long term, the price difference on the swing trades translate to real profit.

This is true for all the swing trades I am making, each sell-buy difference adds up to the long term profits.

With one caveat though: as long as I am still operating at a total profit relative to my weighted average price base.