How to Manage Your Risk when Swing Trading - dummies

How to Manage Your Risk when Swing Trading

By Omar Bassal, CFA

Part of Swing Trading For Dummies Cheat Sheet

The most important determinant of whether you’ll be a successful swing trader is how well you manage risk. Ask yourself these questions before placing a trade to ensure you don’t cut corners:

  • Is the security liquid?

  • Is the security a penny stock (hopefully not)?

  • Are you prepared to limit losses at the individual stock level? Determine which precautionary measure you’ll take:

    • Set the position size based on the percentage you’re willing to lose (0.25 percent to 2 percent of total assets).
    • Set the risk level as a straight percentage of assets and that percentage doesn’t exceed 10 percent of your total portfolio.
  • Is your portfolio diversified? Make sure your positions are spread among different market capitalizations (for example, large cap, mid cap, and small cap), different sectors, and asset classes (not to mention domestic and international securities).

  • Have you limited your total portfolio losses to 7 percent? Cover all your bases by confirming that

    • Each security in the portfolio has a risk amount equal to the difference between the current price and stop loss level.
    • The difference on an individual security level is tight — around 0.50 percent.
    • The sum of those differences doesn’t exceed 7 percent of the total portfolio value.
    • The stop loss levels are at a level representing a profit (barring a gap in prices, of course).

Cut losses when your stop loss is hit — no questions asked.