Swing Trading for Dummies Summary (C15): 10 Deadly Sins

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To be a successful swing trader, not only do you need to follow the ten simple rules, you also need to avoid some things.

This chapter covers the ten most important things for you to avoid.

While it’s true that doing the things mentioned here won’t necessarily mean immediate loss of capital, if you continue to make these mistakes, the consequences will catch up with you eventually.

The best thing to do is avoid all these things all the time.

How much capital you start with depends on your goals. If you’re content with making $500 a month, then you will obviously need less than if you plan to make a full-time income.

A decent swing trader can expect to make at least a 10% annualized return. So you just need to do the math.

For example, if you want to generate $5000 a month, you’ll need around $600,000 of capital.

10% * 600,000 = $60,000 (per year)

60,000 / 12 (months) = $5000

No matter how much you want to earn from swing trading, $10,000 should be the minimum starting capital. Once you factor in all the costs involved (commissions, taxes, slippage, etc.), working with less than $10,000 will make it hard to make reasonable returns.

Sam’s Note: $600,000 is definitely not peanuts. Even if you have that amount lying around, it is a lot to dedicate for the beginner swing trader. My advice (and what I am doing/did) is to start small (at least $10,000) and reinvest the profits. Keep your day job to bridge the gap until you can build up enough capital (and skill) to make swing-trading your full-time income.

You never know how the market will react when a company reports its earnings, and holding positions in a stock during this time is essentially gambling.

Never enter a position on a stock that has its earnings report date within two weeks, and get out of any existing position at least a few days before its earnings report date.

Sam’s Note: I use www.zacks.com/stock/research//earnings-calendar to get estimated earnings release dates. If an upcoming one is not listed it usually means the company hasn’t released the date. You can use historical earnings dates to predict approximately when the next one will be. Companies generally release earnings every three months.

For our purposes, penny stocks are all U.S. stocks that trade below $5.

These low-priced stocks have low liquidity, are volatile, and are more susceptible to market manipulation.

Stay away from penny stocks.

You must know what your sell signals are before you set a trade and you must follow them.

Do not adjust your plan when a trade looks like it isn’t going your way. It can be difficult to take losses, but when your sell signals tell you to sell, sell.

Don’t make the common mistake of thinking that by holding the stock it will eventually bounce back. While that might be true sometimes, when it isn’t true, it can lead to catastrophic losses.

Doubling down in this context refers to doubling your investment when a trade goes against you.

The thinking is that by increasing your investment in a losing trade, you need less positive movement to break even.

This sounds logical, but it is not worth the risk. If the trade doesn’t turn your way, then not only have you not cut your losses early, but you have doubled your loss.

Never send good money after a bad trade!

On the flipside, doubling up can be a good strategy on a winning trade, as long as the new position size is within your risk strategy considering diversification and position sizing.

Options give traders the right (not obligation) to buy or sell a security at a certain price in the future.

Options are not made for swing trading and are very high risk.

Stay away from them!

You must learn to always stay humble. Even if you’re beating the market by 30% or more.

If you get to thinking that you’re unstoppable, you’re more likely to stop learning.

You must always keep up to date on what the market is doing and continue to educate yourself with trading-related educational materials.

When you know an industry or company well you will naturally be more inclined to invest in it. This is familiarity bias and you need to watch out for it.

The problem is that you may not be investing on sound principles. Additionally, it can lead to you putting too many of your eggs in one basket, i.e., not being diversified.

Always hold positions across multiple sectors as well as multiple asset classes.

The nature of swing trading requires that you trade more than that of the position trader, but that doesn’t mean you should constantly buy and sell securities.

The more you trade, the more costs you incur, and the more time it takes.

As a swing trader, you should aim to hold any single position for at least several days. If you are constantly holding positions for a shorter time-frame than that, you need to look at your trading plan and journal to figure out why.

The golden rule of swing trading is this:

Plan your trade and trade your plan.

If you don’t follow this, your chances of success drop significantly.

Write down your plan, follow it, and revise it as needed, but only if needed.

Read the first chapter of Storyworthy here.

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