Your style choices

I get lot of emails from blog readers asking about trading and how they can learn to trade. One of the issue lot of beginner traders do not understand is lot of active traders swing trade, while many new traders come to market with the intention of position trading.

Sometime they come with misconception they have picked up from some book or website which tries to sell position trading or trend following as "the only best approach".

If you look around the trading universe and look at large sample of traders you will see that there are two basic styles traded by traders:

1. Trying to capture .5 to 1% profit on overall capital
2. Trying to capture 5 to 30 % return per trade on total capital

Trying to capture .5 to 1% profit on overall capital (swing and day trade)

In this approach traders are trying to capture say 500 dollar to 1000 dollar profit with 100k account. They do hundreds or in some cases thousands of trades in a year.

Swing trading with low risk per trade is done by traders for this.

You need to do hundreds or thousands of trades in a year to make big money in this style.

Relatively smooth trajectory of return is the outcome of this type of trading  The primary reason most active traders do swing trading as against position trading is because they want low draw downs. By experience they have learned draw downs create mood swings and is destructive.

Single trade does not move account much up or down in this style of trading. The game is about finding 200 trades that will each generate 1% return on your capital and to do another 200 which may not work but you lose only 500 dollar . Net net you will need to do 400 trades to double the money. This is a slog style.

Swing traders risk  per trade is .25 to 1% of capital in most cases. There are some traders who risk up to 2% of capital per trade. 1% risk means the difference between your entry and stop is 1% of your total account. So if you bought 1000 shares at 20 and stop is 19 then you are risking 1% of your 100000 capital on that trade. Higher the risk you take more will be the up and down in your account. Which can take emotional toll.


Day trading is variation of same thing . It increases the number of trades dramatically and also many or most day traders risk larger than 1% of capital per trade. Those who make big money day trading risk significantly higher capital per trade. They often risk entire account on a trade for few minutes.

In day trading risk per trade is higher but as trades are closed in few minutes or hours your risk is controlled. That is why they can take big risk. But again those who swing big size in day trading find fluctuation in account.

In swing trading or in day trading your returns are function of :

Number of trades

Per trade risk

Per trade profit

To improve returns you can increase any of these variables....or increase leverage.

Swing trading is relatively easy to learn and can offer thousands of trade as stocks tend to move in momentum bursts of 3 to 5 days. There are many swing trading methods employed by traders but the ultimate objective remains same to try and make .5 to 1% on total account.

Because of the large number of trades involved in this style you can learn quickly. You can correct course and cumulative knowledge builds rapidly as you do more trades.

Trying to capture 5 to 30 % return per trade on total capital ( position trading)

In this style traders want to capture big multi week or multi month moves that can increase account in big increments. Infrequent trade held for longer duration that try and capture a big move is what this style is about. The objective is to increase the account in 5 to 30% increments. 

Trend trading and position trading approach aim to do this.Number of trades in a year may be 5 to 20 for these traders. There are not many opportunities like this in a year. Lot of work in this style of trading is in identifying the right opportunity.

Most important thing to understand about this style of trading is that you need considerably higher order skills and knowledge to do this. It will take you long time to develop this kind of skills. If you are going to be doing only 5 trades in a year there is little chance for course correction.

Because you are only going to be placing 5 to 20 bets in a year margin of error is low. You ought to get them right.

In order to make 5 to 30% returns on your total capital in this approach you need to risk larger amount per trade compared to swing trader. Position traders take bigger risk per trade often putting in 50 to 150% of account in one good idea.

Which again means you need to get this right or you will have big draw downs. Larger risk per trade if not done right can lead to large draw downs and that is why you will see trend followers often have huge draw downs of up to 50% or more. They try and glamorize it by saying you need to have that to catch large moves.

Your ability to find the right stock at right time to bet big on is the key to success in this approach. You need very well thought out strategy for this. Against that in swing trading you are relying on large number of trades to make money.

For beginners the challenge is in learning this kind of style.Things which you do only few times in a year might be difficult to learn as against things you do 1000 times in a year. This is a challenge for those wanting to learn this style. It might take you long time to learn as the trades are infrequent.

Most beginners under estimate the challenge involved in this style and so they soon get disappointed. To stat with they start with wrong assumptions and expectations. 

Both styles work. But you need to approach each with understanding of logic behind them. And to make them work you need persistence of 6 months to a year or more.