Should you become swing trader or trend follower | stockbee

9/11/2013

Should you become swing trader or trend follower

As a swing trader you want to focus on the fastest moving stocks in the market. They offer opportunities for explosive gains in short period of time.

Momentum stocks have that characteristics. They move in short term explosive bursts of 3 to 5 days. Go back and see the last 5 day winners and you will see that stocks can make big explosive 8 to 40% move in matter of days.

Swing trading is well established practice in the market for hundreds of years. It has been focused on finding these kinds of explosive moves and trading them for short term gains. It is a high turnover strategy which tries to compound money by taking hundreds of thousands of these 8 to 40% kind of moves in a year.

Swing trading  is not for everyone. Some like to focus on finding longer term trend moves and betting big on them. They are temperamentally suitable for that. That kind op approach requires higher order skills. If you are going to say put only 10 bets in a year you need to be very confident and skilled in selecting those 10 trades.

Swing traders on the other hand put in thousands of trades so one single bet has not much effect on their success. It is the average win rate that matters.

I get lot of emails from readers of the blog saying they want to only focus on longer term trades. Some of them want to do it because of job pressure , while some want to do it because some one tells them trend following is the best approach. This is the most frequently asked question in emails I get. Most important question you need to ask yourself is what level of skill do you have in trend following or position trading.

As a practical matter let us say you do not have much of skills and are new trader or wanting to develop your skill, ask yourself this question what will build your skills faster ? A activity which you do only 5 or 10 times in a year or an activity which you do 1000 times in a year. If you cook Turkey only for Thanksgiving it will take you many years to be good at it. But if you cook them daily you will become an expert in one month.

Learning is faster if more trades are involved . It will allow you to build your skill faster  as you get feedback on success or failure of your trade parameters faster. You can experiment and change variables to improve your skills. The feedback loop being shorter you will gain expertise faster in swing trading. Once you become good at swing trading it is easier to swing to larger time frame.

Another argument frequently made against swing trading is high commission and transaction cost. Which many times is a crutch. Trading costs for active traders are very low currently. 10 years ago costs were 30 to 50 dollar for round turn. Now they are 3 to 10 dollars.

I always tell those who approach me to look around and explore these issues and make informed decision. Lot of time in the market there is absolutism. There are people who will say trend following is the only way to trade or growth investing is the best way , or only their way is the best approach. Which is not very logical or helpful.

I use a combination approach in my trading. I have two sets of  accounts , one focused on swing trading where I do thousands of trades and another  focused on position trading where I look for stocks with potential for big 50 to 100% plus kind of moves and then buy big  on those stocks holding very few positions.




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