Swing trading is a form of trading that can last for days or even weeks to take advantage of the short-term price fluctuations of stocks or securities. Although swing trading provides attractive ways of making profit from volatile markets, it also holds high risks.
Swing trading is not an easy task since the traders are likely to be influenced by psychological tendencies which are not profitable when not well controlled. This article will outline the main mistakes that are worth avoiding when trading and provide clear recommendations for swing trading.
This paper aims to establish that an organization that does not have a strategic trading plan is likely to suffer from several drawbacks.
Swing trading involves a system that is rigid with a certain set of rules and guidelines to follow as well as analysis.
Unfortunately, many neophyte traders jump straight into swing trading without defining the risk profile, target gains, entry/exit points, and positions sizing while trading. This lack of planning makes them make trading decisions based on intuition without considering the possible risk reward ratio.
They also do not have profit targets and stop losses for the trades they make and this means that they can lose as much as they want.
They should therefore have a detailed plan of the trade, including the time frame of the trade, the technical indicators that they will use in making their entry and exit points, and ways of minimizing the risks involved. Backtesting and paper trading also help to confirm the effectiveness of the strategy before real capital is placed at risk.
Giving in to Emotions
Swing trading also leads to emotions such as fear, greed, regret, euphoria and panic that affect the trader in his decision making.
If these feelings are allowed to dictate the trading choices, it results in adverse behavior such as closing profitable trades earlier than necessary, holding onto unproductive trades for too long or entering trades without assessing the risk parameters.
For instance, traders may not follow their strategies and impulsively purchase securities when prices are rising due to greed. They may also get nervous and dispose of their investments at the slightest dip merely due to fear.
To reduce emotional risk, swing traders should trade with smaller lot sizes, use stop losses, and set trading rules that include considerations for high emotion situations.
Inadequate Risk Management
Swing trading is an approach that can be very risky to the extent that many of the traders who practice it do not follow appropriate risk management measures.
Here, they make large lot sizes which are more than their account size and expose too much capital in a single trade. They also do not set stop losses which can be a very risky thing because if the trade is going in the wrong direction, the trader will lose a lot of money.
The following are the recommendations of the author in the article rather than determining the appropriate position sizing based on historical volatility and account size. In every trade, one should set the stop loss to avoid losing too much.
Applying larger stop orders to avoid getting out of position during temporary countertrends. Ensure that you set the maximum loss thresholds for the trading account and do not exceed these limits. Risk management is the process of making the outcomes of the trade more predictable in the long term.
Lacking Discipline and Patience
Swing trading, on the other hand, requires traders to be disciplined and patient enough to remain in trades during short-term trends and avoid taking profits or losses prematurely.
Unfortunately, the traders rarely follow their trading plans to the letter when operating in the real market environment. They also close out their profitable swing trades prematurely because they are scared or they cut their losses in losing trades due to stress.
The traders also do not possess the much needed patient that is required in the various pull backs and interruptions in the expected price trends. So, traders should work on developing rules for trading which will help them to manage uncertainty and fluctuations. It is advisable to begin with a small amount of capital and only increase the size of the position when the system has been proven to be profitable over a number of trades.
That is why it is recommended to set entry and exit rules based on technical signals in order to build discipline.
Conclusion
With the knowledge of some of the most frequent mistakes such as lack of planning, emotional disturbance, ineffective risk management, and intolerance, swing traders can prevent them by using the proper measures.
Staying disciplined and following proper trading procedures while developing mental strength is the way to go when it comes to ensuring that one achieves success in the long run when swing trading.
