Swing traders take advantage of short-term swings in the stock market, and they usually hold their assets for less than a month. Some investments produce returns in just a few days. Swing trading can be a lucrative way to make money, but you could lose a lot if you don’t have the knowledge you need to succeed and you end up making the wrong decisions. Here are some useful tips for becoming a part-time or full-time swing trader.
Set Reasonable Goals
Swing trading focuses on small, short-term gains and cutting losses quickly. Making a large profit with one trade is rare. Long-term traders usually expect a 20 to 25 percent profit over a month or two with each transaction, while swing traders look for a 5 to 10 percent gain over five or 10 days.
Making several swing trades could be more lucrative than making one similar long-term investment. However, you should always make sure that you have enough capital to cover several consecutive losses. Remember that your average losses and gains matter more than the results of any single trade. Be patient and don’t expect immediate success. Changing your strategy because a few stocks didn’t meet your goals could lead to even larger losses. You could reduce your gains by sticking with an unsuccessful investment for too long and hoping that things will turn around.
Minimize Your Losses
Since swing traders receive a smaller profit with each trade, you should also tolerate smaller losses. Long-term investors often wait to sell until a stock loses 7 or 8 percent of its value. When you keep an asset for months or even years, it has time to recover from a downturn. Since the stocks that you swing trade won’t have as much time to regain their value and grow, you can’t tolerate big losses. You should sell after just a 2 or 3 percent decrease.
Any stock that’s skyrocketing now could start to crash tomorrow. Avoid investing in just one business. A bad story on the news increases in costs, or other factors could wipe out your investment. Instead, diversify by researching and purchasing three or four companies at a time. Buying and selling often will also reduce your investment in any single asset. Making several smaller investments is more time-consuming, but it minimizes your risk. Focus on an industry that you’re familiar with to make research easier.
Decide on a Time Limit
To make a living by swing trading, you need a regular source of income. It’s tempting to hold onto a stock that’s doing well, but no trend lasts forever. You won’t be able to keep increasing your capital consistently without selling and buying relatively often. Avoid holding one position for more than around six weeks to make taking advantage of market swings and taking care of expenses like your mortgage easier.
Align your trade with the overall direction of the market
S&P 500 is the best criterion to measure the overall direction of the market. The discussion of trades and trends never gets completed without touching the markets primary and intermediate trends as measured by the S&P 500. By providing the clear context, these trends help every trader make short-term trading decisions. Irrespective of the fact that your trade is successful only for a limited time period, it will be quite possible for the larger trends to reassert themselves if you focus only on the short-term decisions. The identification of longer-term trends ensures that you go with the market flow and not against it.
Always enter a trade with a clear trading plan
A clear trading plan includes the four key elements namely: a target, a limit, a stop loss and an add-on point. Swing trading may lead you to impulse buying which may or may not prove profitable at times. Always be clear that without a transparent trading plan you are just gambling, not trading. Keeping all the four crucial elements of your trading plan crystal clear in your mind will go a long way when you implement your plan practically.
With the right research and enough capital to absorb any losses, you can pay for your next vacation or a new car through swing trading. You can even make swing trading your new career.