Free swing trading guides for beginners: stages, position sizing, earnings risk

What swing trading is, and what it is not

Swing trading means holding a stock for several days to several weeks to capture a part of a larger move. It sits between day trading, where positions are opened and closed within a day, and long-term investing, where positions are held for years.

Why people choose it

You can do the work after the market closes, so it can fit around a job. You trade from charts and rules rather than from headlines.

What most guides skip

• Losses are normal. Even skilled traders lose on a large share of their trades. What matters is keeping losses small and letting the occasional larger winner pay for them.
• The market comes first. Most stocks follow the general market trend. Buying breakouts when the major indexes are falling tends to fail.
• Execution is the hard part. Knowing the rule is easy. Following it when a trade goes against you is the skill.
• It is not a signal service. No course can tell you what will go up next. A good one teaches you a process and how to measure it.

The 4 stock stages: why you only buy Stage 2

Every stock moves through four broad stages. A simple rule keeps you out of most trouble: only look for buys in stocks that are in Stage 2.

The four stages

• Stage 1: Basing. Price moves sideways for months around a flat long-term average. The stock is resting, not trending.
• Stage 2: Advancing. Price is above its 50-day, 150-day and 200-day moving averages, which are rising and stacked in that order. This is where uptrends happen.
• Stage 3: Topping. Momentum stalls. Price swings widen and heavy volume shows up on down days.
• Stage 4: Declining. Price is below a falling 200-day average, making lower lows and lower highs. A “cheap” stock in Stage 4 usually gets cheaper.

Check the major index first. If the market itself is in a downtrend, even good-looking stocks tend to struggle.

Position sizing: how many shares to buy

Position sizing answers one question: if this trade fails, how much of my account do I lose? Decide that number first, and the share count follows.

The formula

Shares = (account size x percent risked) / (entry price – stop price)

A worked example (illustration only)

• Account size: $10,000. You decide to risk 1%, which is $100.
• Planned entry: $50.00. Stop-loss: $47.50, which is $2.50 below entry (5%).
• Shares = $100 / $2.50 = 40 shares, a position of $2,000.

If the stop is hit, you lose about $100, or 1% of the account, not more. A wider stop means fewer shares, and a tighter stop means more.

Why earnings reports and corrections wreck accounts

Two situations cause outsized damage to otherwise careful swing traders.

Earnings reports

A company can report after the close and the stock can open far above or below the previous price. Your stop-loss cannot protect you from a gap that jumps right past it. Holding a new position with little or no open profit through a report is a coin flip that has nothing to do with your chart.

Market corrections

When the major indexes fall, many breakouts fail. Traders who keep buying “dips” in a falling market often take a string of small losses that add up. Standing aside is a legitimate position.

• Know the date. Check when each stock reports before you buy it.
• Decide in advance. Make your rule for earnings and corrections before you are in the trade, not during it.
• Count the damage. Track how often your losses come from gaps and from trading against the market.