Although swing trading tends toward smaller gains in a quicker time frame, that doesn’t mean you give up the potential for a great year. You can thank compounding for that. But as your gains compound, you are putting more dollars at risk with each new position. Sometimes it’s OK to take your foot off the accelerator by adjusting your position size down.
Our Swing Trading Position Size Template
This year, we started treating SwingTrader as a portfolio for performance calculations. Every position, addition, reduction and deletion had a transaction in shares associated with it based on the price at the time of the alert to subscribers. Each full position used a weight of 12.5%, meaning eight full positions would get you fully invested.
What happens when you have big swing trading gains for the year? Each full position might still start at 12.5%, but that’s going to be a much larger dollar amount due to the increase in portfolio size. In a strong trend, that works to your favor due to compounding. But it also adds additional risk that can take away gains quickly. That risk gets larger as the market gets extended.
As an example, if you had $100,000 at the start of the year, each full position would start at $12,500. After gaining 20% in your portfolio for the year, your full position is increased to $15,000 (12.5% of 120,000). With SwingTrader looking at performance gains topping 60% for the year, the full position size would increase to $20,000 (12.5% of 160,000).
Bigger Positions Bring Bigger Hits
With increased position size, swing trading losses can take a bigger toll. Consider a recent trade in ServiceNow (NOW). It joined SwingTrader on Aug. 10 and exited the next day, after undercutting its lows. The 3.3% loss knocked off 0.75% of our year-to-date gain.
When you have lots of gains with a few hitting 10%, 15% or more that’s not a problem. But when the gains are harder to come by and end up being smaller, it can stifle progress. You can see from the SwingTrader performance chart how progress above 60% hasn’t been easy since mid-July. As a result, we’ve been trying to lock in our first third earlier, just to take some off the table and make holding easier.
Swing Trading Position Size Adjustment
A key tenet of swing trading is to keep your losses small. If you have a maximum risk of 4% for a trade and want to limit the risk to your portfolio to 0.5% or less, a 12.5% position gets you there (0.5%/4% = 12.5%). Given where we are in the market, we’ve captured the low-hanging fruit by hitting it hard on reversals in May and June. So we’ll risk less to make sure we keep our gains.
Just shifting down to a portfolio risk of 0.36% and keeping our trade risk the same puts our full position size down to 9% (0.36%/4% = 9%). Since we’ve been taking swing trading profits off in thirds, this can also make the calculations easier for subscribers. Roughly 9% for a full position, 6% after the first third is off, and 3% after the next third is off. Of course those numbers will differ based on how the trade has progressed.
Managing your portfolio constantly requires adjustments based on market conditions. Two people trading the same exact stocks can have very different results based on how heavy they invest and treat entries and exits. Position size is just one lever of the equation for success, but it’s an important one to get right.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available.
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View more information: https://www.investors.com/research/swing-trading/position-size-adjustments-temper-swing-trading-risk/