How to Swing Trade Summary (C5): Risk and Account Management

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The goal of swing trading is not to buy and sell.

It is to make a profit.

This may seem trivial, but it is an important mindset to adopt.

In order to profit, you don’t need to ‘win’ all the time. That’s impossible. Instead, concentrate on the long game. As long as your overall wins outweigh your overall losses, you are making a profit.

To ensure this, you need a good risk management strategy.

It is risk management that will prevent you from making emotional decisions and losing it all.

You must always consider both the upside (possible profit) and the downside (possible loss) of a trade.

The variance between the two is your risk/reward ratio.

You always want a minimum of a 1:2 risk/reward ratio.

For example, if you risk a loss of $1, then your possible profit must be at least $2.

By using this ratio, you will still be profitable even if you are only right 40% of the time.

A stop-loss is a specific price at which you will sell your asset if the trade goes against you.

The profit target is a specific price at which you will sell your asset when you profit.

Knowing your entry price, stop-loss, and profit target allows you to calculate your risk/reward ratio.

In your trading platform, once you have bought an asset, you can set your stop-loss and profit target so your asset will automatically be sold when either of those targets is met.

The stop-loss prevents you from losing too much money.

The profit target ensures you take profit at your target price. Many people will take profit too early, only to miss out on gains. This negates the risk/reward ratio and is detrimental to your profits in the long run.

On the flipside, you may hold on too long, only to see the price move against you, thus losing all your gains.

It is important to create your trading strategy before you enter a trade and stick to it. This helps to prevent emotions from taking over.

Never risk more than 2% of your capital on a single trade.

That means if you have $1000 in capital, you cannot risk more than $20.

This does not mean you can only buy $20 worth of the asset. Rather, it means that your possible loss can’t be more than $20.

Keeping a trading journal will allow you to track your success rate and tweak your overall strategy.

It also helps you keep track of your positions, and to take notes for possible setups.

Exactly how you keep the journal is up to you. It can be a simple spreadsheet, pen and paper, or perhaps an app.

Note from Sam: I like to use a Google Sheet so I can make formulas in the cells to automatically calculate risk/reward ratios, position sizes, and other things.

What you record is up to you also. Start with the following and then tweak it as you need:

• Date
• Overall market and sector sentiments
• Source of trade idea
• Technical indicators
• Upcoming events
• Entry price
• Stop price
• Target price
• Risk/reward ratio
• Profit/Loss
• Comments

Review your journal at least once a month. Identify what is working, what isn’t, and what needs improvement in your trading strategy.

Emotions run high when money is on the line.

Creating a trading strategy and setting stop-losses and profit limits is invaluable to keep you in check, but they are not foolproof.

You must have the mental fortitude to stick to your strategy.

Of course you can improve it as you learn more and gain experience, and you must be flexible if there are drastic changes in the market, but as a general rule, once you decide your strategy for a trade, stick to it.

Your overall health also plays a big part. When you are physically healthy, your mental status will be better, and you will make better decisions. Eat well, exercise, get enough sleep, and do what is needed to keep your stress levels down. That means taking breaks, spending time with loved ones, practicing mindfulness, etc.

Read the next chapter here.

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