Our methodology of swing trading to position trading means that we may leave some open profits on the table along the way and the thought of that can make many traders uncomfortable. Fact is, there is really no way around it. We never know when a trend will end and your not going to call the top, the sooner you can come to grips with this the better off you will be. Most importantly, we will never make those occasional larger gains that really beef up our return if we keep taking the small easy ones. Provided market conditions are trending favorably, once we have locked in swing trading profits on half of our position, we then must trail our stop on our remaining shares outside the normal volatility of each individual stock, within reason, and give that profitable position some room to work. Our trading methodology makes our trading process much more stress free since we are booking profits on half our position with the shorter term swing trade. This does a couple things for us. Number one, it cures that desire that all traders have, and that is to trade. Secondly, it banks some worthwhile profits for our trading account which are obviously necessary.
But the really beauty of the methodology of swing trading half our shares of a position and holding the second half, for hopefully larger trend following gains, is that it pays for a lot of the chop that our trading accounts go through and minimizes the dangers of overtrading at the same time. Just one or two gains a year of 50%, 75% or even 100% or more by following the trend with half our position pays for a lot of that chop, and then some. Most importantly these types of gains, if we can attain them, really pad our average winning percentage and limit the amount of trades we need to make to achieve our goals. A look at the math should clear this up and drive home the point.
Trader #1 averages 10% on his winners and 5% on his losers. His win/loss rate is 50/50 and he devotes $5,000 to each trade and makes 100 trades for the year. Assuming these numbers Trader #1 will net a profit of $12,500.
Trader #2 has the same 50/50 win/loss rate and likewise devotes $5,000 to each trade. However, he only averages 5% on his winners while responsibly cutting his losses at 2%. This trader will need to make 167 trades for the year to equal trader #1’s profit total.
To put this into perspective, Trader #2 by making 67 more trades forced himself to make 134 more trading decisions as each trade includes a buy and sell decision. Over the course of a long trading career that’s a lot of undue stress. I don’t know about you, but I’d much rather be Trader #1. It is true that we don’t always have cooperative markets that make it easy to log large gains on individual stocks in any given year, but we still must make every effort to maximize our winners to the extent that is it reasonably possible.