SWOT Trading Strategy — What Is It?

Last Updated on July 30, 2022 by Oddmund Groette

Identifying core strengths, weaknesses, opportunities, and threats leads to fact-based analysis, fresh perspectives, and new ideas, which are the benefits of a SWOT analysis.

SWOT analysis is a technique for assessing the performance, competition, risk, and potential of a business, a product line, an industry, or any other entity. Stock market analysts and traders can use it to estimate the fair market value of a company’s stock, while credit analysts use it to better understand a borrower’s creditworthiness.

Let’s find out what SWOT is about.

What does SWOT analysis mean?

SWOT analysis is a framework for assessing the performance, competition, risk, and potential of a business, a product line, an industry, or any other entity. It is designed to facilitate a realistic, fact-based, and data-driven assessment of an entity.

SWOT stands for Strengths, Weaknesses, Opportunities, and Threats. Those constitute the internal and external forces that may create opportunities or risks for an organization. Strengths and weaknesses are internal factors, which are characteristics of a business that give it a relative advantage — or disadvantage, respectively — over its competition.

Opportunities and threats are external factors. Opportunities are elements of the external environment that can be used to improve performance (revenue sources), while threats are elements of the external environment that may hinder performance or even the ability to operate as a going concern — for example, regulatory issues or technological disruption.

The SWOT Table

Internal factors External factors
Strengths Opportunities
Weakness Threats

The components of SWOT

Here are the elements of a SWOT analysis:

  • Strengths: These refer to those areas an organization excels at, which separates it from the competition — a strong brand, loyal customer base, a strong balance sheet, unique technology, and so on. For instance, an investment fund may create a proprietary trading strategy that returns market-beating results and can use those results to attract new investors.
  • Weaknesses: They refer to those areas the entity needs to improve to remain competitive: a weak brand, higher-than-average turnover, high levels of debt, an inadequate supply chain, or lack of capital.
  • Opportunities: These refer to favorable external factors that could give an organization a competitive advantage. Examples include technological innovations that might help improve efficiency or changes in social norms that are creating new markets or new sub-segments of existing markets.
  • Threats: These refer to factors that have the potential to harm an organization. Examples include things like rising costs for materials, increasing competition, tight labor supply, and so on.

Uses of SWOT analysis

SWOT Analysis was first used to analyze businesses, but now it’s often used by governments, nonprofits, and individuals, including investors and entrepreneurs.

Businesses use it to guide their operations toward strategies that are more likely to be successful and away from those that are likely to be less successful. Independent SWOT analysts or competitors can use it to assess whether a company, product line, or industry might be strong or weak and why.

The analyst and investor community, on the other hand, may use it to seek to understand (and quantify) strengths, weaknesses, opportunities, and threats in order to assess the business more completely. Findings from a SWOT analysis may help inform model assumptions among analysts. For example, an equity analyst can use SWOT analysis to estimate the fair market value of a stock, while a credit analyst may perform a SWOT analysis to understand a borrower’s creditworthiness.

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