Swing Trading – 5 Rules To Make You More Money Today!
Swing trading is a fun and exciting form of stock trading that I have been doing for the last 9 years. Swing trading and all trading for that matter are incredibly hard despite what some of the ‘gurus’ online tell you. Over the years I have lost a ton of money but at the end of the day been just good enough to come out on top.
Trading forces you to think logically and act rationally. It causes you to check your emotion at the door and after all of that, you may still have a losing trade. I have had a month where everything went horribly wrong and months where everything went perfect. No matter what people tell you all forms of stock trading is a gamble but rules can help lower the risk on that gamble.
Before you hit that buy button, you need to set rules for yourself. You may think you’ve found a perfect pattern or system but again, you have no clue what that stock’s price is going to do. Setting rules may be the easiest part of swing trading. Actually following them though, is a constant mental battle. I used to think about these and just forget them. Now I have them printed out and posted so I’m always conscious of them.
Here are my five trading rules:
- Chart every stock first.
- Find a line of support/resistance.
- Any buy/sell must be done via a stop-entry.
- Have position size limitations.
- When a trade is initiated a counter trade must be placed immediately.
Are these rules perfect? No, but I can almost guarantee that by following them you will be a more profitable trader in the long-run. Below I’ll take you through each one and tell you exactly how I find things like a support line and how I size my positions. At the end of the article, I’ll have a link to my FREE swing trading guide.
1) Chart Every Stock First
The very first thing you need to do is chart the stock. If you are familiar with swing trading then you know that when you are doing your research you are looking for patterns in a stock price. Essentially this is you charting that stock but it also still a good habit to actually do it. Charting the stock acts as a double-check for what you already believe to be true.
Charting can be done with the platform you trade on or through websites like StockCharts.com or even Finviz. Personally, I use Think Or Swim which is a TD Ameritrade product even though I trade on Interactive Brokers. The reasons behind that are for another post but you need to find a platform that you can chart on as well as look at different time windows. For example, a year view broken down into weekly candles or a three-month view broken down to daily candles. All of these factors are important.
When you take the time to chart a stock it doesn’t allow you to make an impulse buy. This also helps with FOMO which is the emotionally part of trading that I talked about above. Chart your stocks, take your time.
2) Find Your Line Of Support/Resistance
Chances are if you are charting the stock then you already have an idea of what a line of resistance or support may be. Resistance is a price that a particular stock has hit a certain time and been unable to breakthrough. Support is just the opposite. A stock’s price has bounced off a couple of times but has not gone under. Resistance or support will be one side of the pattern you found above.
In the image above you can see an ascending channel on the stock $XPO. Over and over again it was getting rejected around $116/share. This is a line of resistance. An example of a line of support would be what is currently happening in the stock $BABA. Which has bounced off of the $129/share three times now!
3) Any Buys/Sells Must Be Done Via A Stop-Entry
Once you’ve established a line of resistance or support, then you can find an entry price. This price is when the stock breaks through the line. This is often referred to as a breakout. For the $XPO stock above I would say that my entry price would be somewhere in the neighborhood of $117. What I’d then do is set a buy-stop order at $117. Here is a screenshot of what that would look like:
Using stops as entries take away the need for you to manage every position constantly. Instead, you can set your orders and just wait. This is all about following a system and not just guessing. Also to prove that this works. XPO never hit $117 so the trade would have never gone through. It now trades around $63 or -47%, yikes.
4) Have Position Size Limitations
Position size is the easiest yet most ignored rule in a trader’s toolbox. I’ve broken this rule a dozen times and 9 times out of 10 I get burned, bad. Every time you buy a stock you need to consider your position size because the facts are you will have losing trades. It doesn’t matter if you’re the best trader in the world you will have some losses. Unless you have a crystal ball, which if you do then email me.
How you manage your position size is 100% up to you. Through trial and a lot of losses, I’ve settled on different percentages I’m willing to lose per trade. This is based on the percentage of my portfolio that the position is. It sounds complicated but it’s actually simple. Here is what I follow:
- 20% of portfolio position, max loss of 2.5% = .6% potential total portfolio loss.
- 30% of portfolio position, max loss of 2% = .6% potential total portfolio loss.
- 40% of portfolio position, max loss of 1.5% = .6% potential total portfolio loss.
As you can see every scenario leaves me with a max loss of only .6% of my whole portfolio which is relatively small. I used to trade my whole portfolio into one stock. I did this over and over again losing 1%-3% every time. That adds up really quick and there’s nothing small about those losses.
I’ve now decided to keep all of my positions between 20% and 40%. Just big enough to make a difference if I do see again and small enough to mitigate risk. It’s not perfect, but it feels balanced to me.
5) When A Trade Is Initiated A Counter Trade Must Be Place Immediately
My next rule is the easiest of them all IF you follow rule #4. When your stop entry occurs and you finally own a stock, you need to place a trailing stop to counter it. This needs to happen immediately especially if you’re like me and don’t have the time to sit at a monitor all day.
A trailing stop works by setting a certain % that the stock has to go down before it will automatically sell. Automatic being the key. An example of this is if I buy a stock for $100 a share with a 2% trailing stop-loss and that stock immediately drops to $98 then it will sell. Let’s say that stock goes up to $110 without dropping then the stock would need to drop 2% from that $110 or down to $107.80 before it would automatically sell.
If you have a good entry then the stock should go up almost immediately. All a trailing-stop does is protect any gains you may have received. While also protecting you from the potential downside of that stock. Here is a screenshot of what that looks like from my trading account.
The first thing you need to do is make sure the order type is a trail or trailing stop. Then set your stop price. If you’re using a percentage (which I highly recommend) then this number won’t matter. Just set it a couple of dollars less than the current stock price.
Trailing amount, type, and time-in-force are the three most important things here. The amount is going to be based on rule #4. In this example, I have a 2% loss because my position is 30% of my portfolio. Make sure the type is %, but you can choose the amount if you want to do the math. Lastly, time-in-force needs to be ‘Good till Cancel’. Your other option is just for the day but remember, we want to set it and forget it.
Stops have saved my account more than once. Use them.
Bonus Rule: Don’t Hold Through Earnings
My last rule that deals with individual positions are to NEVER hold through earnings. Yes, again I’m speaking from experience here and not a great one. Earnings are a literal coin toss. Every quarter a public company has to report its earnings. On the other side of it, a bunch of ‘smart’ people decides how much these companies should be making. We call them analysts and honestly I think they just make things up. Regardless, these numbers are compared and if companies beat the estimate their stock will go up, usually by a decent amount.
On the other side of this, when a company misses its projected earnings, it can get real ugly real fast. I had a position in Twitter that dropped 20% overnight and there was nothing I could do about it. Your stops, which you set in rule #5, are only available to go through when the market is open and companies don’t report their earnings when the market is open.
The easiest and smartest way to mitigate risk is to just not hold through earnings at all. If you buy a company and want to know when they report earnings, google it. It takes a couple of seconds and will save you a lot more money.
The Bottom Line
At the end of the day, there are hundreds of different systems and rules for swing trading. Above is what I use and a good starting point for any new trader. Trading involves years of trial and error (emphasis on the error) but through discipline, it can be well worth it.
Like I mentioned at the beginning of this article the hardest part for anyone is following their rules. Controlling your emotions and thinking logically can become quite challenging when you are dealing with large sums of money. I’m talking from personal experience here. I have forced trades or held on too long and it has almost always cost me money. It’s not worth the stress so let your rules and systems work for you.
If you want my full FREE guide to swing trading then click the link below.
This will tell you everything you need to know from start to finish so you can start swing trading today.
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