How swing traders make money

DAIO is the kind of swing trade that I look for on breakout side daily. Stock showed up in breakout scans on Friday early morning. I entered at the price of  11.53 with 1000 shares order. 4 Days later sold it for 13.07 in the morning for a  profit of  $1532. 

Hundreds of trades like these show up in the market. These are momentum burst moves where stocks make 8% to 40%  moves in short period of 3 to 5 days. 

Swing traders look for 8% to 20% kind of moves in a short period of time. They look for hundreds of them in a year.

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.

The implication of that is in order to make big returns in a year you will need anywhere from 300 to 1000 trades depending on how much you risk per trade.

This is in line with trade count of most traders who make money trading . I have asked several successful traders how many trades they do in a year and most do upwards of 200 plus trades.

Which most people do not understand and that is why they are looking for position trading method which will give them that kind of return in 4 to 5 trades.

That is possible, if you are extremely selective in selecting your trades. And if you have extremely well developed expertise in identifying those 4 or 5 sure winners. Very few people in the trading world will have that skill. And if you are asking how to do it you have several years of learning curve ahead of you

The easier path is to swing trade and expect to make 400 to 1000 trade if you are looking for triple digit kind of gains.

But 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 1 to 4% profit move contributes more to his or her returns. Add to that leverage and you are looking at magnified returns.

So let us say a day trader with 100k capital buys 1000 shares of 50 dollar stock and get out same day for 2 dollar profit , he has made 2000 dollars or 2% on his capital . Even catching a 50 cents move with 1000 share lots makes them 500 dollar or .5% returns on total capital. And then they make 20 to 25 trades like this in a day where they might just make 100 to 300 dollars , and lose 100 to 300 on some , in the process ending up with say 2500 dollar for day.

A swing trader will not be able to match a good day traders profit unless they find very big EP kind swings and risk big.

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

Look for opportunities to put bigger amount of capital per trade while managing risk. If your stop is very close to entry you can with just .25% or .50% risk put in sometime 60 to 70% of capital in one swing trade.

If large trades are not available then look for several small trades.

Strive to keep per trade loss as low as possible. If you can keep your losses small you will have better mood to trade and can take several trades without going through emotional ups and downs.

It does not matter if you have lot of wash trades you close immediately if they do not work. Especially if you are trading a momentum burst kind phenomenon you want the trade to rocket off immediately.

Anticipation allows you to put more money in trade for same unit of risk

The single biggest advantage of anticipation trades is it allows you to put a stop very close to entry.

As a result for say same amount of .5% or 1% risk you can often get sometime 70 to 100% or even more of account in one trade. That allows you to move the needle faster.

Dollar breakouts and Low threshold breakouts also allow you to do the same thing.

Focus on dollar breakouts, they offer you opportunity to risk bigger per trade.

Stop dreaming about doubling money in few trades (if that happens that is bonus, but you do not base your method on that). While it is possible and one must everyday focus on finding them at same time keep on collecting small profits. it will give you the ability to risk big on select few trades.

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 big swing trades where you can risk big up to 25% of capital and try and make 20 to 40% on them...... But frequency of those trades largely depends on market conditions

Your returns are also function of your ability to take bigger risk. For same % return trade a bigger size obviously magnifies return. A 5 dollar profit on 100 shares position is 500 dollar but someone willing to take big risk like Dan Zanger it might be 5000 dollar profit on 1000 shares.

If you want big returns, once you perfect your setup and have track record of over 100 to 200 trades with 2:1 profit and 50% kind success rate then you can increase your per position risk to 1 to 2% per trade and your returns will improve.

But when you do that number of trades you do will automatically decrease as you will not be able to take as many trades...

While most traders highlight carefully selected example of what has worked to show their greatness, reality is they also have many small profit trades.

It is also misleading way to lure people in to believing long term trends is best. Most of those examples are also old stocks. Where in hindsight saying you should have held CSCO or something like that.

They might be doing 200 to 400 trades but then they just highlight the 2 or 3 that gave them most profit to highlight their method. But that is reality distortion.

Many want to do very few trades. But then do they have the edge to find those kind of big winners. I would also like to do only one trade in a year and make triple digit returns.

The reality is then you have to be damn good at picking that one shot and risking 100% of your capital. It is a fantasy which many people have.

You might get something like that in a year, but you do not base your strategy on it. That is my view. Everyone has different view.

Understand the maths of swing trading and active trading and you will know which variable to control....

If your win rate is low focus on setup quality

If your per trade profit is low focus on either improving it or increasing number of trades.

At the end of the day most swing traders try and make money by doing several hundred trades that give them .25% to 5% returns on total capital per trade

5% kind returns not so common so they do hundreds of .25% to 1% return .

Study Anticipation in detail and put significant effort in making anticipation as part of your setup mix

Trading both breakouts and anticipation setup will give you better returns than just trading breakouts.

Many anticipation trades will move your account faster than breakout trades as your risk (entry-stop) will be lower.

Add high capitalisation and high liquidity setup to your mix for same reason

High cap stocks are not very fast movers but they have often low volatility , that allows you to risk big on them with close stops.

If is easier to take 3000 to 5000 or even more shares position in extremely high cap and liquid stock with close stop. A 8 to 10% move in such situation can help you move the needle on your account.

Focus on top 2% stocks by capitalisation and stocks that daily trade more than 9 million plus ( minv3.1>=9000000)

Look for low risk entry on them and do bigger size.

Overall add the following to your trade mix :

Anticipation

$ b/o

Low threshold b/o

High cap high volume stocks

This will allow you to do some size trades and possibly hold longer

If you are really serious about making money swing trading then develop expertise in these kind of setups. Once you master them you can find money making trades regularly.