Swing Trading Risk Management
Its always important to stay up to date on the current market and notice what swing trading strategies are working and what is not.
We also want to know the best way to manage risk given the tendencies in the current market.
In this blog post we will go over what strategies have been working for us and ways we can take advantage of opportunities while managing risk which is what trading is all about.
Swing Trading Risk Management in a Volatile Market
Through August, 2022 is the worst year for the market in more than five decades.
That is not five years, 10 years or even 20 years.
Its the worst stock market in over 50 years. Still tracking worse than 2008, in fact. As we feared late last year, accelerating inflation, rate hikes with more inflationary events looming is a very bad mix for stocks and bonds both.
So it makes sense to really manage your risk tightly when swing trading in this environment. One of the best ways to manage risk is using the technique taught in our primer on one of our favorite swing trading strategies.
Commissions are Now Free
With most online brokers, commissions are now free. So it makes more sense than ever to take some profits once a stock moves 5% to 15% in your direction and raise the stop when swing trading. In our experience, the biggest winners tend to hold the technical entry point on pullbacks pretty well.
Raising the stop in volatile markets to about 2.5% to 3.5% below the technical entry (not where you got in) will generally work if its going to be a big winner. So you can quickly make the trade close to risk free if the trade gets off to a good start.
Only taking trades that have a lot of volume and a catalyst around the time it reaches the entry trigger will more often get you off to a strong start in a trade. This is another key during challenging market conditions.
So take advantage of free commissions or at least take this into account when coming up with an entry/exit trading plan for each trade. We used this strategy to lock in a profit on the SWAV earnings flag trade that recently broke out. Now we can monitor market conditions and look for another good technical entry point if conditions are still good enough.
The original SWAV trade we featured to customers in early August kept going higher for days so we were able to sit on the trade and let it go longer before taking it off for a big profit.
Trade the Best and Forget the Rest
This is a great way of trading – especially in tough market conditions. It also helps to manage risk.
But how do you actually apply this approach?
Well first we identify the most bullish technical patterns in most markets historically and monitor how well they are performing in the current market. Once we see certain market factors improve and the pattern start to work, we can then start to trade the best opportunities.
Its tough to beat the high tight flag pattern for targeting big profits swing trading. However, we have found that the win rate goes up dramatically when we wait for the ones that break out with a certain set of conditions present before and when it reaches the entry point.
Here is an example of a stock that recently formed this pattern and broke out with nearly all the conditions satisfied in our high tight flag strategy.
Here is what the chart looked like on the morning of August 12th.
Chart courtesy of StockCharts.com
Prior breakouts did not meet all the rules in our high tight flag strategy until the morning of the 12th. The fact that it was a Friday during the summer actually lowers the win rate a bit but other factors taught in the high tight flag course were suddenly flashing green.
The stock blasted out of the pattern that day and continued higher as can be seen on the latest chart. The stock shot up 70% over the next 3.5 weeks while holding a 2.5% stop below the technical entry point.
Now if you play every high, tight flag in these market conditions with a tight stop your win rate might be 20% or less. Waiting for the ideal ones is key to success in this type of market.
Big Double Bottoms
Another strategy that is working better recently is the double bottom pattern and the double bottom with handle on a weekly chart. We just featured one to customers on Wednesday that ran nearly 5% higher in the first hour after reaching the entry trigger.
Here is another we featured the week prior that is off to a good start. It too has the fundamental factors to do well in the years ahead.
We already took some profits and now have a very high probability of a profit overall using the strategy taught in the free primers on the site.
This is also the pattern that both ENPH broke out of right after we featured it to customers in late July. SWAV also broke out of this pattern right after we showcased it in early August.
So we continue to monitor these patterns on a weekly chart especially. However, we only look for top stocks and stay away from speculative stocks like ALT with this technical swing trading chart pattern.
Know the Tendencies and Expect More Losers to Manage Risk
Even with some big winners mixed in, we can expect a lower win rate when the market indices are traveling below a declining 200 day moving average when going long. More volatility will shake you out of more trades as well.
Its really important to have a good entry/exit strategy in this market and a good trading plan. One tendency we are noticing is that a lot of stocks are moving about 9% or so higher from good technical entry points before pulling back strongly in many cases.
We can use this tendency to take more off in that profit range and raise our stop.
At the same time, we are seeing a fair amount of big winners that are blasting out of strong technical patterns. So if a stock gets off to a great start with strong volume, we can take less off initially and sit on the trade for at least a few days before taking more off. The exception to this is high tight flags on more speculative stocks that don’t hold up well during their first consolidation intra-day on day 1.
The market indices are still carving out typical long-term bear market patterns so we have to factor this into our thinking for a longer-term hold. The big third and fourth leg down in a long-term bear market may be coming up early next year.
Or, the third leg down may be starting now. So far the 3900 area on the S&P 500 is holding well but we will be tracking it closely later this month which tends to be one of the worst couple weeks of the year.
Jumping the Gun Often Ends Badly
Most technical trading strategies have a trade entry trigger that corresponds with a breaking of a key resistance level. With a high tight flag this is often a break of the high in the consolidation.
In a double bottom it might be a strong bullish candlestick pattern near the 2nd low or a break of the center point in the overall double bottom or a close above the downtrend resistance in the handle as shown above.
In a weak market, this becomes more important because most stocks will just drift lower for long periods of time. If the stock cannot break the key resistance in the trading pattern with conviction, its just not going to make a big move higher.
We would rather sit and cash and wait for an ideal swing trading opportunity and stock.
Massive volume as it reaches the entry is what we want to see which requires plenty of patience and a lot of ideal bullish consolidation patterns on our watch list.
Explosive Stocks we are Watching for the Weeks Ahead