In the weekly learning article published on July 15, 2017, we discussed “A Stock Drops Below your Entry Price; When Should You Get Back In.” We hope that the article was useful. Today, we move on to a new topic, where we are going to discuss “Swing Trading.”
What is swing trading?
Swing Trading is a strategy focused on achieving small profits and cutting losses in short term trends. Compared to long-term investment periods, the gains you make from swing trading might be small, but if done consistently over time they can compound into excellent annual returns. Swing Trading positions are usually held a few days to a couple of weeks or can be held for a longer period.
How is it done?
Let’s start with the basics of a swing trading strategy. Rather than targeting 20% to 25% profits for most of your stocks in the portfolio, the profit goal is a more modest 10%, or even just 5% in tougher markets. The swing trader’s focus is not on gains developing over weeks or months; the average length of a trade is more like five to ten days. Following this strategy, you can attract a great deal of small wins, which will add up to big overall returns. If a 20% gain over a month or more motivates you, adding 5% to 10% gains every week or two can add up to significant profits. To see growth in your portfolio, you should also keep your minimize your losses. We are aware of the normal 7% to 8% stop loss rule followed by CAN SLIM, but here the stop loss has to be a maximum of 2% to 3%. This will keep you at a 3-to-1 profit-to-loss ratio, a sound portfolio management rule for success. A profit to loss ratio refers to the size of the average profit compared to the size of the average loss per trade.
How to apply CAN SLIM in a swing trading environment?
Although the CAN SLIM methodology is focused on longer-term investment periods, its rules can still be applied in a swing trading environment.
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