So you want to be a swing trader. Get in line, because a lot of other
folks have exactly the same idea. In fact, thousands of new traders try
their hand at the market casino each year. Unfortunately, most walk
away a little poorer and a lot wiser. But things could turn out better
for you if you get it right from the get-go.
I’ve complied a list of the best questions submitted to me by new
traders. I hope my answers will shorten your learning curve and get you
on the road to profitability as quickly as possible. But good advice
goes only so far when it comes to trading longevity. So slow down, take
your time and make this intense discipline a lifelong quest.
Question: My goal is to trade for a living, and I’ll soon have
the money needed for my account. I spent the last 13 months just
watching the markets, paper trading and gaining the experience needed to
avoid beginner’s drawdown. What else can I do?
Answer: Pre-trading preparation takes you only so far, because
there’s a degree of risk-avoidance in the process. Paper trading lets
you game and consider all the angles without actually losing money. But
realize you will draw down, and you will lose money with real trades.
You need to get used to that idea right now.
The problem is there’s a lot about trading you won’t understand
until you place yourself at risk. So you have no choice but to jump in
and learn the hard way. In fact, it’s the nature of risk that determines
your ultimate success or failure in the markets. I always recommend
that new traders expose themselves to real losses as soon as possible,
so they can get past the book learning of technical analysis and Trading
You’ll find your losses have a much greater impact on your
thinking and strategic planning than you can imagine or believe right
now. In fact, they’ll make you tone deaf and give you 10 thumbs. The
trick is to survive long enough to wrestle that beast to the ground.
Question: What is a good average return for swing trading? What percentage of my portfolio should I put to work on any trade?
Answer: No two traders are alike, nor do they approach the markets
in the same way. Some folks do this part time and risk very small
percentages of capital. Others do it full time and place a high
percentage of equity at risk in each trade. Some have $5,000 discount
brokerage accounts, while others manage large hedge funds.
Swing trading isn’t an exact science or a system. It’s a way to
get an edge so you can profit from trades. Every swing trader chooses to
enter and exit the market in a slightly different way. So the average
returns are all over the map, from those who double their money every
six months to those who can’t beat the interest rates in their checking
Question: Do you recommend a 1% or 2% limit on capital risked per swing trade? Is 5% too aggressive?
Answer: If you’re an experienced and profitable trader, using a
percentage of capital is a good way to manage risk. But if you’re a new,
semi-new or struggling trader, this isn’t the best way to approach
position sizing. Each trade setup has a size that’s right for your risk
tolerance. This is independent of your account size. Newer traders
routinely take positions that are too large for their risk or knowledge
level. In fact, their overall performance suffers when they take larger
trades, because (a) they get so jumpy that good trades are exited too
soon, or (b) they hold positions too long because they panic watching
the wider swings and get the deer-in-the-headlights syndrome.
Question: Is it realistic for a new trader to grow an account by 5% to 10% a month?
Answer: Returns of 5% to 10% a month are completely unrealistic
for new traders. The question actually reflects a larger issue. New
traders need to focus on the dynamics that generate price movement and
not worry about making money. These processes take a very long time to
understand. Trying to make money interferes with trading education,
because it creates all types of performance anxiety issues. Learn to
trade well, and the money will eventually follow.
Question: How would you recommend trading an account size of $150,000?
Answer:You don’t need all that money in your account to trade. In
fact, it’s more of a liability than a benefit for a new trader. You
probably don’t need any more than $35,000 maximum at your stage of
development. All the extra money will do is demand you trade it and
raise your risk above an acceptable level. As for how you allocate the
money in your account, the answer right now should be “mostly cash.”
Question: Could you comment on what to look for on the ticker tape when taking a long or short position?
Answer: The bottom line is you’re looking for convergence. Each
trade strategy has unique characteristics that identify it on the price
chart. The ticker tape adds another type of signature, and what you see
should match the chart most of the time. In narrow range situations,
there’s really nothing to look at, because you’re entering a dead
market. In pullbacks, look for panic or overexcitement and a thin
bid-ask. In breakouts or breakdowns, the tape should print lots and lots
of volume, with price pulling away from support or resistance in a
Question: How can I interpret the changing spreads I’m watching
on Nasdaq Level II? How can understanding this tool help my trading?
Answer: I don’t believe you can predict direction from Level II
quotes (these show you all bid/ask spreads from market makers, not just
the narrowest). The best thing you can do is to predict interest and
liquidity. Different stocks have different personalities on the tape.
Some stocks trade very wide price ranges for their float. The spread
changes during different times of the year, as average volume
fluctuates. Realize you’re not seeing true supply and demand on Level
II. Most exchanges and ECNs have ways to hide order size, so you’re
actually seeing a lie. The best way to use Level II is to trade against
its directional movement, as long as it’s approaching a key level on
your setup chart.
Question: I want to be a full-time trader. I understand it’s
feasible to make $500 to $1,000 a week for every $10,000 in the trading
account. Is this accurate?
Answer: This is a very unrealistic and dangerous assumption. If
you can make a 100% return on your capital in a year, you will be in a
very elite group indeed. Sure, you can make $1,000 in a week on a
$10,000 account, but at that risk level you’ll wash out of the market
quickly because of bad or unexpected losses.
New traders should start with very small positions and continue to
trade small until they put together a decent track record. Then they
should increase risk and exposure until their stomachs tell them they’re
trading too big. Don’t worry about making money for a long time.
Instead, worry about trading well. The biggest problem new traders face
is the urge to trade. They jump in too quickly and get crushed.
Thousands of other traders out there have been doing this for
years. These folks like to feed on new traders and their naivete. Your
job is to survive until you can become one of them. Their level of
dedication is almost fanatical. Many pros spend more than 70 hours a
week involved in the markets, one way or the other.
Question: How can I tell if I’m suited to a career in trading?
Answer: To begin with, you have to be very talented and motivated.
You also need to realize the goal is as tough as graduating from an
elite school with a degree in hand. No one is printing money, and all
the technical analysis in the world is just an introduction to real-life
trading. You’ll lose a lot of money before you learn to trade
profitably. That’s just the way it is. Most folks underestimate their
reaction to losses until they’re faced with big positions moving against
them. This emotional hurdle is often the most difficult obstacle to a
successful career in trading.
Question: You said “newer traders suffer with larger positions
because (a) they get so jumpy that good trades are exited too soon, or
(b) they hold positions too long because they panic and get
deer-in-the-headlights syndrome.” Can you elaborate?
Answer: New traders don’t really understand why stocks go up or
down, so it’s hard to make good decisions when their positions move
against them. Of course, they’re taught all kinds of risk-control
methods, but that goes out the window as soon as they watch red ink
growing in their equity curve. This confusion is reinforced over time,
because they stop out of many positions just as they reverse. A tendency
builds up to let price move past their stops. The end result is a lot
more confusion and even bigger losses.
Question: Should new traders paper trade first?
Answer: Paper trading is a good idea for beginners, but it has a
built-in flaw. Real-life trading is far more complicated and stokes the
emotional fires. Paper trading naturally gives you the best prices and
the cleanest profits. The markets give you the exact opposite most of
Question: I’m a new trader and am having trouble using trailing stops. Can you help me?
Answer: I think using trailing stops is an advanced trading skill.
New traders may be better off taking single direct moves, building up
their equity, and dealing with trailing stops at a later date. Try to
get one thing right when you start out, and take your profits quickly.
Then worry about making more money as you gain experience.
Question: How much time should a new trader spend looking at a
chart? I believe you said if you have to look too hard, it isn’t there.
Answer: I can spend less than a second looking at a chart for a
trading opportunity. If I see something, the rest of the analysis takes
only a minute or two longer. But newer traders shouldn’t expect this
kind of speed for many years. It is true that a good setup will engage
both sides of your brain and elicit an emotional response immediately.
That either happens very quickly or it doesn’t happen at all.
Question: Is the holding period flexible once I choose one for my swing trades?
Answer: Don’t let a holding period be a noose around your neck,
but realize the market is a 3-D chessboard. It’s best to pick one
holding period and learn to play it well before moving on to another.
Here’s the problem: You adjust your time frame in midstream. It
pays off. The next trade comes along, and you’re now conditioned to
change the holding period if things don’t work out, so you start losing
money and don’t take your loss. Now you’re in a lot of trouble.
Question: Would you define sector rotation and how it impacts the daily trading environment?
Answer: Money chases opportunity in the markets. But there’s only
so much money to go around. Broad trading strategies take money out of
sectors that reach price targets or achieve goals, and put it in new
sectors as they come into vogue. Sometimes this is based on valuation;
other times it’s based on the technicals. In fact, there are as many
reasons for sector rotation as there are institutions and traders.
Again, “rotation” means money is being removed from one area of the
market and placed into another.
Intraday leadership influences how sector rotation impacts the
trading environment. The market searches for leadership each morning and
can latch onto a variety of internal or external forces. Different
sectors can rise to the surface at any time and become the leaders or
laggards for that session. Quite often, market leadership affects
sectors indirectly. Different types of leadership tell traders and
institutions what’s hot that day, and what’s not.
Question: What type of stop would you use when shorting a stock?
Answer: Don’t differentiate between long and short positions when
considering stops. Exit the position at the price where your reason for
being in the trade has changed or been proven wrong. This “failure
target” should be part of your initial trade analysis, based on support
and resistance. Your stop-loss should then change as price action
evolves. Keep a failure stop, a break-even stop and a profit-protection
stop in mind, depending on how the market moves away from your entry.
Personally, I don’t like using either a flat stop-loss or a percentage
stop-loss. There’s no logic with either of them, as far as I’m
Question: How do you manage market sentiment?
Answer: I start with a bias and then let the market show me what
it wants to do. If price action supports my bias, I get more aggressive.
If it’s opposing my bias, I slow down and reconsider my point of view.
You have to be careful with knee-jerk reactions to external events, such
as “the market will probably go down today due to the earnings
warnings.” You have to consider the time period, intraday reversals,
triple-witching effects, oversold conditions, etc.
Other traders hope you confine your analysis to just “up” or
“down” for the day without considering all the twists and turns. If your
opinions are rigid, professionals will position themselves against you,
because you’re unprepared to deal with an adverse outcome. To avoid
this fate, use a continuous feedback mechanism that lets you adjust your
expectations as soon as market conditions change.
Question: You’ve written that it’s impossible to make money
using technical analysis. Isn’t that what your column, book and seminars
are all about?
Answer: There’s an important distinction here. Swing trading and
technical analysis are two different disciplines. Many folks are great
at TA but terrible at trading. Everyone is an armchair technician, and
this takes little effort or commitment. But putting your money on the
line every day is another story entirely. I like to think I teach
traders, not technicians.