Swing Trading is a strategy that focuses on taking smaller gains in short term trends and cutting losses quicker. The gains might be smaller, but done consistently over time they can complex into excellent annual returns. Swing Trading positions are usually held a few days to a couple of weeks, but can be held longer.
Swing Trading Strategy
Rather than targeting 20% to 25% profits for most of investor’s stocks, the profit goal is a more modest 10% or even just 5% in tougher markets.
Those types of gains might not seem to be the life-changing rewards typically required in the stock market, but this is where the time factor comes in.
The swing trader's focus isn't on gains developing over weeks or months; the average length of a trade is more like 5 to 10 days. In this way, investors can make a lot of small wins, which will add up to big overall returns. If they are happy with a 20% gain over a month or more, 5% to 10% gains every week or two can add up to significant profits.
Smaller gains can only produce growth in their portfolio if losses are kept small. Rather than the normal 7% to 8% stop loss, take losses quicker at a maximum of 2% to 3%. This will keep them at a 3-to-1 profit-to-loss ratio, a sound portfolio management rule for success. It's a critical component of the whole system since an outsized loss can quickly wipe away a lot of progress made with smaller gains.
Swing trading can still deliver larger gains on individual trades. A stock may exhibit enough initial strength that it can be held for a bigger gain, or partial profits can be taken while giving the remaining position scope to run.