Dynamic vs. Static Risk Management for Swing Trading

Are you one of the many swing traders that takes the same level of risk notwithstanding the market conditions?

Do you always trade “a thousand” shares just because that's an easy number to remember?

Do you have a hard time picking the best stocks for swing trading?

I will discuss some finer points that might help you to become better at managing risk.

First and foremost, the T3 Trained Trader (T3TT) should have a Trading Plan outlining his/her money management rules.

Here you should establish parameters such as a “maximum loss per week-month”.

When establishing a maximum loss per trade (because no one can know which trade is going to work out), the T3TT has to decide whether he wants to follow a more “static” approach where all the potential losses will be similar, or whether to adopt a more “dynamic” set of guidelines created with the purpose of governing when to be more aggressive, less aggressive, or not active at all.

You have to understand the fact that not all market conditions present the same odds for a particular trade.

Let's say, for example, that market “x” is in an up-trend, and has pulled back to support over several days.

Today we get a reversal bar, and then the reversal is complete.

In this case, the swing trader will likely find several high odds entries both today and tomorrow (depending on the tactics used, many of which are taught in our T3 Technical Strategies Course.

The third day comes along, the market continues to climb, and some more entries might be executed.

As the market continues to rally, the odds of every new entry following through will diminish, as the probability of a reversal to the downside in market “x” is greater.

Based on this scenario, a swing trader might enter into larger positions on days one and two, and might reduce his share lots as the market continues to climb.

There will be a time when the market has climbed for 5 or 6 days in a row, and so the T3 Trader will devote more and more of his time to manage already open positions, by selling partial lots and raising stops, instead of being too active in entering new swing positions. (He might be more active in micro trading activities though)

Using some modified version of this basic concept, the T3 Trader can implement an intelligent way to participate in the markets, while reducing the risks of getting caught with big positions on a reversal contrary to his positions.

Trade Well!