SWOT analysis is an important method of conducting analysis on stocks and other financial assets. It is broadly used by corporate managers who are entering a new market or launching a new product.
The strategy is also used by companies that are assessing whether to implement a merger and acquisition (M&A). In this article, we will look at the concept of SWOT analysis in day trading and investment.
What is SWOT analysis?
A SWOT analysis is a method of looking at an asset in a number of ways. S stands for Strength, W for Weakness, O for Opportunity, and T for Threats.
Let's talk about Strength. For example, in the place for a merger, a company can look at the strength that the combined companies will have on their industry.
Adobe’s $20 billion buyout of Figma gave the company more tools for developers. Similarly, Microsoft’s buyout of Activision Blizzard gave it more clout in the gaming industry.
Weakness refers to the potential downside for a situation. For example, in case of the Adobe deal, there was a potential weakness that it was overpaying for the company. Also, a weakness could be that the deal would not give the company the clout it needed.
Opportunity refers to the main reason of implementing a deal. It seeks to answer the question about what opportunity will a deal have on a company. For example, a deal could have an opportunity in that it will give a company an extra market share in an industry it desires.
Threat, on the other hand, looks at what could go wrong in a situation. In our M&A example, a threat refers to factors that could have an impact on a deal.
For example, in case of an M&A deal, a threat can be a situation where a deal is rejected by a regulator. Also, there is the threat of a bidding war that will push the acquisition price significantly higher.
This SWOT analysis can also be used in day trading, as We will explain later in this article.
How to do a SWOT analysis
A common question is on how to do a SWOT analysis in day trading. There are several steps you need to follow in this:
- Have a set of objectives - You should always have a set of objectives when you are doing any deal or making any decision. For example, what are you trying to achieve when buying a stock? A goal should be easy, achievable and realistic.
- Know your resources - When doing a SWOT analysis, always know your resources. For example, in case of a M&A deal, know your financial resources and whether you can finance the acquisition.
- Identify threats and weaknesses - The other important part is that you should identify key hindrances to a situation early on. For example, when you open a bullish trade, always look at the key threats and set a stop-loss.
- Come up with a comprehensive plan - Come up with a plan that includes all these factors SWOT factors. In case of a corporation, you should work with your team to identify all these issues in advance. For a day trader, having a trading journal is a good way to start.
SWOT analysis in trading and investing (with example)
To be clear, conducting a SWOT analysis in day trading is not always easy. However, experienced traders have found a way of doing it at a faster pace.
In summary, a trading SWOT analysis aims to look at the strength, weaknesses, opportunities, and threat of a trade. To do that, we recommend that you use an advanced template or trading journal that will make it easy for you use.
Let us use an example of a company like Coinbase and conduct a SWOT analysis.
First, the company has numerous strengths since it is a leading crypto exchange. Unlike most other crypto exchanges, it is registered in the United States and is audited by Deloitte.
Also, as a publicly traded company, it is regulated by the Securities and Exchange Commission (SEC). Therefore, as other exchanges collapse, Coinbase could attract more customers.
Second, its weaknesses are that the company is not as profitable as other large companies like Schwab and Interactive Brokers. Also, its performance tends to track that of Bitcoin and othe cryptocurrencies.
As such, even when the company is doing well and cryptocurrencies are not, it means that its performance could struggle.
Third, the opportunity of investing in Coinbase could be that the company will continue doing well if cryptocurrencies rebound.
Finally, threats include the collapse of the company, a bank run as we saw with FTX, and lack of profitability.
It is also possible to carry out a SWOT analysis in day trading, especially when a company is about to publish its quarterly results.
SWOT analysis in day trading career
Another way to conduct a SWOT analysis is when you are determining whether to become an investor or day trader. Here, you could look at the strengths of being a day trader.
For example, you can assess your knowledge and interest in the financial market. On weakness, you can look at your day job and whether you will have enough time to day trade.
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On opportunities, you could identify a few issues. For example, there is an opportunity of day trading bringing in more money than your day jobs. Also, there could be an opportunity of transitioning your trading account into a day trading floor.
There are many threats in day trading. For example, it is possible for your account to implode after one or more trades. Also, if you are running a trading floor, there is a possibility that your traders will sabotage your career.
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Other areas to conduct SWOT analysis
There are other areas where you could conduct SWOT analysis in your day trading career. For example, you could assess the model that you will use.
In this case, you could do a SWOT analysis on whether to be employed by a large investment bank or whether to do trading at home. Also, you could decide on whether to start your trading floor.
Another area to conduct a SWOT analysis is when you are considering whether to be a day trader or an investor.
An investor is a person who buys and holds a position for a while a trader buys and exits positions at a faster pace. The two approaches have their pros and cons, which you should look at in a SWOT analysis.
Further, you could conduct a SWOT analysis on the broker that you will use and the platform you will use to execute your trades.
Combining SWOT with technical and fundamental analysis
Another way to conduct a SWOT analysis is to combine it with other types of analysis like fundamental and technical analysis. Fundamental analysis is an approach that looks at broader market factors and how they affect the financial market.
It also looks at key issues like valuation and the most recent news about an asset. Technical analysis, on the other hand, looks at the chart patterns and uses indicators like moving averages and the Relative Strength Index (RSI).
You could use SWOT analysis in combination with these popular trading analysis strategies.
SWOT analysis is an important decision-making approach that can be used in all industries. It is used when making to level decisions such as mergers and acquisitions. Also, it can be used narrowly when a person is making investing and day trading.
External useful resources
- SWOT Trading Strategy: What Is It? (Backtest And Example) - Quantified Strategies