## 1/26/2012

### Understanding the maths of swing trading

Swing traders look for 5 to 20% kind of moves in a short period of time.

In order for these moves to make a difference to your account you need to understand the maths of returns.

Let us say you hold 20 positions of same size in your 100k account. Then each position becomes 5k. Let us say a stock you buy goes up 10% after entry , how much is it going to contribute to your overall profit.

Only .5%. You will need 200 such trade for a 100% returns.

But wait a minute for most traders the success rate of a trade actually working is going to be around 50% only. Which will mean 200 trades will not get you to doubling.

Supposing you risk 25% on each trade instead of 5% of capital. Then a trade with 10% potential will give you 2.5% overall return. If it is 20% return trade it will give you 5% overall return on your capital. You will need roughly 15 consecutive trades of 5% overall profit to double your money.

And you can keep on doing this math to understand the maths of swing trading better.

The implication of that is in order to make big returns in a year you will need anywhere from 300 to 100 trades depending on how much you risk per trade.

If you do not want to do that then position trade. You can if you have skills  look for position trading method which will you that kind of return in 4 to 5 trades.  Very few people in the trading world will have that skill.

The easier path is to swing trade and expect to make 300 to 400 trade if you are looking for triple digit kind of gains.

But at the same time, everyday look for opportunity where you can put in 25% or more of your capital in one idea. In a year if you get few of those big wins of 4 to 5% or 10% returns on your capital, it then drives your returns higher.

If you understand this maths you will also understand why good day traders make big returns. It is simple maths, there per position risk is higher. A day trader often puts in significantly large part of his capital in one single trade. So even a small 3 to 4% profit contributes more to his or her returns. Add to that leverage and you are looking at magnified returns.

Now let us suppose you understand this maths , how can you use it in real life trading.

1. Look for opportunities to put bigger amount of capital per trade while managing risk

2. Strive to keep per trade loss as low as possible. It does not matter if you have lot of scratch  trades you close immediately if they do not work

3. Focus on Stockbee Dollar breakouts, they offer you opportunity to risk bigger per trade.

4. Stop dreaming about doubling money in few trades (if that happens that is bonus, but you do not base your method on that if you are swing trader)

5. If you are holding 40 to 50 small positions, realistically look at the probability of you making big returns. It will be low. Mutual funds do that and that is why their returns suck.

Most importantly understand the maths of swing trading means finding 20 or so swing trades in a year  where you can risk big......

Laser said...

throwing 25% of capital at a trade is favorable, or maybe even a little more. It's better to invest large in the best stocks and close your position quickly if your wrong, then try to find many good stocks. For example, if you invested in apple back in november with a 6% drop as your stop loss (estimating an 18% gain using 3-1 stop/gain ratios) you would've not hit your stop until after the peak at 640 and sold at 600. If you were watching closely you probably would've jumped ship at 620ish. You would've bought yours tock three months earlier at below \$400 a share, for over a 50% gain. If you were on margin, you doubled your money. FInd the winners and invest big, and drop em as soon as they stop running.

Laser said...

...I wrote a long comment and it was deleted... Oh well, the jist of it is that you should invest large, like 25-50% of your capital on the best trades you can find, and drop them as soon as they start turning or immediately if they flip on you before profit if they hit your stop-losses. When trading always know ahead of time how much your willing to lose if your trade goes bad. If you notice a trade behaving unexpectedly, get out before you lose any more money. Don't be too greedy with stop losses tho, as sometimes volatility will shake you out then run up, leaving you with a loss rather than riding the gain.