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Holding a Swing Trade

Holding a Swing Trade
We have mentioned how hard it has been to swing trade this market because of the whipsaw days and weeks we have recently had in the market.  Tonight I thought we would talk a little about holding swings trades. 

You notice a beautiful buy setup and you determine that you want to trade it. It is 1:00 pm and the buy point is hit so you buy it. Then at 3:00 pm the market changes direction and starts to sell off. You get nervous thinking about what might happen if you hold this position overnight so you end up selling it.  If this has happened to you you are not alone; it is common behavior among traders.  Some seem to be afraid to hold positions overnight. Thus they unconsciously revert to very short term trading not because that is what makes sense for them but because they are afraid of holding overnight. This might be the product of past experiences that have influenced the trader's psychology (such as a huge gap against their position the next day) or a lack of a proper plan money management strategies etc. 

The bottom line is wealth from the stock market is not created by only doing micro time frame trading (day trading or scalping).  Yes there are many good day traders and scalpers but their results are very small profits doing many trades. These small gains do add up over time but takes a lot of work.  The swing trader can make much more doing a lot less work providing they are in the right stocks at the right time and in a market cycle that is conducive to the swing trading style.  We really have not had optimal swing trading conditions lately but the time will come again when the market will allow profitable swing trades and we want to be ready. 

The swing traders I am talking about are a vast majority of wealthy individuals that trade the markets for a living by holding positions overnight for days weeks and even months.  That is the only realistic way to take advantage of several day moves often powered by gaps that are more difficult to take advantage of without holding a position overnight and trying to chase it at the open. 

Swing Trading Tips
If you are experiencing this problem there are a few things that you might consider in order to make it easier to hold a several day swing when the market conditions improve:

1) Make sure you have a money management plan designed to diminish the risks involved in your trading. Do not hold a position that is more than 10% of your total portfolio.  If you establish a day trade position that is more than 10% (which is common) reduce your position to 10% if you are going to hold it over night.  A gap against the position of this size will not obliterate your account. However if you have a 50% day trade position and you hold that over night you could be almost wiped out if there should be bad news before the open the next day. 

2) Analyze the market environment. Is the market at support Is the market in an up or down trend We never trade against the trend.  Has the market moved up for several days in a row away from support In this case taking long positions are higher risk.  Wait until the market has pulled back to support to enter your new positions or if short wait for a rally into resistance. 

3) Make sure that the stock you plan to hold is not reporting earnings within the next few days. 

4) Trade based on the timeframes that are relevant to swing trading (do not make swing trading decisions based on a 1 minute chart). 

Using some of these tips might help you eliminate some of the risks associated with holding overnight and will make it easier to take advantage of this profitable trading style.

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