How Much Money do I Need to Swing Trade Stocks?
So, you're thinking of swing trading stocks and wondering how much money you need to swing trade stocks.
How much capital you need to swing trade depends on the strategies and position size you use. As swing trading requires bigger stop losses than, say, day trading stocks, you require more capital to keep your trade risk below 1% of your trading capital.
But don't get disheartened. In this article, we'll present a few risk-controlled scenarios for different levels of capital that will improve your chances of success from swing trading stocks.
- What is Swing Trading?
- Have a Risk Management Plan for Swing Trading Stocks
- Can Stock Swing Traders use Margin?
- How Much Money You Need to Become a Stock Swing Trader
- The Problem of Not Having Enough Capital to Swing Trade Stocks
- What Happens if my Trading Account Drops below my Original Trading Balance?
- What are Realistic Returns for Swing Trading Stocks?
- How Many Stocks do You Need for Swing Trading?
- How do I Find Stocks to Swing Trade?
- Can I Swing Trade Stocks With $1000?
- Recap of How Much Money Do I Need to Swing Trade
What is Swing Trading?
Swing trading is a style of trading whereby the swing trader takes trades that may last several days or even weeks or sometimes months.
Your profit target may be higher than day traders who close trades at the end of the day or stock scalping traders who take multiple trades for a few pips each trade in a trading session.
Swing traders follow momentum, ideally when a stock is trending in a clear direction. The swing trader intends to capture a big chunk of profit in as short a time as possible and may only take a handful of trades each week, sometimes even one trade if the potential profit target is worth the wait.
If you aim for 8% profit from a stock trade and the stock moves 1% a day, it will take eight days before you exit the trade. But, if the price went up and down daily – as it does – that eight days could be longer. And there's no guarantee the price will go up or get near your target.
You can do swing trading with most markets such as Forex, futures, options and stocks. Any financial instrument with the potential for big market moves is attractive to the swing trader.
The popularity of swing trading stocks is that there is always a stock moving with momentum if you know where to look.
If, after reading this article, you decide you don't have enough capital to swing trade stocks, the Forex market is easily accessible. You can start trading currency pairs with Forex for a few hundred dollars.
Read More: Complete Swing Trading Guide
Have a Risk Management Plan for Swing Trading Stocks
There are many strategies for swing trading stocks, but the most crucial element of swing trading stocks is to determine your risk management.
This risk management plan determines the position size for your trades
- Establish how much capital risk you will have on each trade – swing traders risk less than 2% of their capital, preferably 1%. If you have $10,000 in your swing trading account, your 1% risk is $100 per trade.
- Establish your trade risk – you decide where to set your stop loss and take profit areas for every swing trade you take. Your stop loss gets you out of a position that is going against you with a predefined amount.
To see how this works, let's create a stock purchase scenario:
You decide to risk 1% on a swing trade
The stock price is $20
Your stop loss order is $19.50
Your trade risk is $0.50 per share
1% of your account is $100
Calculate $100 divided by $0.50 = 200 shares
So, 200 shares is your position size
Of course, you don't have to commit $100 to one share. You could split the trades with another similarly priced share, or you could, for instance, choose two different shares at $10.00 each.
You could, if you wanted, reduce your risk to 0.5%
However, the concern with trades less than $100 is the exchange commissions for your trade. A $100 trade returns enough profit to manage the commissions.
These are choices you can make when swing trading stocks.
Can Stock Swing Traders use Margin?
Yes, if you are a stock market swing trader, you will be offered a 2:1 margin, which means if you deposit $10,000, you can purchase double the amount of stocks up to $20,000.
However, be careful not to up your trade risk to 1% of $20,000 as you could quickly find yourself in a lot of trouble. Your account risk is based on the capital you deposited, not on the leverage amount.
All trading is risky, and swing trading stocks is no exception. It can be tempting to start small and build up, but one thing to consider is the trade commissions. These costs can add up and quickly become unmanageable.
Ideally, risk $100 per trade. Anything less and commissions can swallow up profits, which defeats the objective. If you're considering placing a $20 trade, you may as well not bother. You will make better profits on larger trades.
How Much Money You Need to Become a Stock Swing Trader
In the United States, the stock exchanges require day traders to maintain a $25,000 account minimum balance. Stock exchanges identify day traders as traders who take four or more trades a week and open and close a trade on the same day.
The good news is that these requirements don't apply to swing traders.
That said, if you start trading a lot and closing trades the same day, you'll suddenly receive a demand to upgrade your account balance to $25k. It's a warning best heeded for the budding swing trader.
So, therefore, you can assess how much capital you need by factoring in your account risk and trade risk. It's as simple as that.
It isn't financially practical to swing trade stock with small amounts such as $20. Your profits would be eroded by the exchange commissions.
So, already, you begin to understand that swing trading stocks requires more capital than, say, Forex, where you can trade easily with a few hundred dollars.
Realistically, a stock swing trader needs at least $5,000 to $10,000.
If you start with $5,000, you may wish to risk 2% rather than 1%, which is still $100. But, if you lose a few trades, suddenly your account is down 4-6%, which takes some recovering.
Let's do some figures on a $5,000 account:
You risk 2% of your balance, which is $100
But the stock you want to buy is $200. It looks like a great opportunity, and you want to buy it.
Your stop loss is $190
Your trade risk is $10 per share
You can buy 10 shares at $200 ($10 x 10 = $100)
The cost is $2000
And you do have 2:1 leverage
Swing trading with $5,000 is possible, But you have doubled the risk, and it depends on how comfortable you are swing trading stocks with increased risk.
Admittedly, a $200 share is extreme. You can do the same exercise for lower-priced shares. For instance, for the same risk, you could buy 1000 x $2 shares. Or to lower the risk, 500 x $2 shares.
Swing trading stocks with $5,000 is possible and can even be effective. But, this exercise shows you the challenges of swing trading stocks with less capital.
For swing trading stocks, a small stop loss 5% away from your entry price is usually sufficient. But this does depend on the strategy you use. If you need to use a bigger stop loss, this changes your position size, so do factor that in.
With a working capital of $10,000, you reduce your risk to 1%.
You can trade more stocks and worry less.
We recommend risking at least $100 per trade based on the premise that you take trades where the probability is high for a win. You also aim for a good risk to reward ratio (RTR) so your return is at least double the risk (2 to 1 RTR).
If you risk $100, you want a return of a minimum of $200, ideally more.
Switch that back to taking small swing trades with $10 per trade. With a return of $20, most of it disappears with commissions. How much money you need to swing trade stocks is dependent on covering your costs and having enough capital to make a decent return.
A minimum of $5,000 to $10,000 is the ideal start-up capital for swing trading stocks.
Nothing good comes without a measure of risk. If you intend to make swing trading stocks part of your financial plan, start the way you mean to go on. As your account grows, you stick to 1% risk but increase your returns over time.
The Problem of Not Having Enough Capital to Swing Trade Stocks
Without sufficient funding, it will be hard to make a living as a stock swing trader.
When you don't have enough capital, it limits which stocks you can trade, which becomes frustrating when you see an opportunity but can't take it because of lack of funds.
If you want to make an income from swing trading stocks, you need more capital.
For instance, if you averaged 5% gain per month, the monetary reward depends on your account balance.
On a $20,000 account, 5% is $1000.
It doesn't seem much for all your hard work.
But, with time and compounding, your account will grow. Imagine your swing trading account balance at $100,000, generating a comfortable $5,000 a month.
Now, bring the account balance down to $2000, and you make a 5% return of $100.
The likelihood is that your account shows a loss because $100 doesn't cover commissions and costs. This situation is demoralising but avoided by committing to a minimum of $5,000 to $10,000 for swing trading stocks.
A typical novice error for new stock swing traders is to fail to have enough capital for their trading account. They want to avoid risk, but it's impossible. Swing trading stocks is risky, as is all trading.
What Happens if my Trading Account Drops below my Original Trading Balance?
Let's say you start with $5,000 and have a series of losses, dropping the balance to $4,000.
If you continue to risk $100, you are putting 2.5% risk on each trade. It's starting to look a bit hairy. But you carry on anyway, and your account drops to $3,000.
You are now risking 3.3% per trade.
The problem with this is now you're freaking out.
You've lost $2,000, and you can't continue to lose money from your account and trade at the same level. With the series of losses, your confidence has dropped. Now you don't trust your performance as a stock swing trader.
How do you overcome a series of losses like this?
Stop trading and walk away.
Take a few days, weeks or possibly even a month or so to go back to the drawing board and assess what you did wrong.
Practice with a stock simulator until you restore your confidence and feel calm about returning to swing trading stocks live.
At that point, you can choose to top up your account back to the original balance or wait until you are ready to do so.
Don't fall back into taking big risks. It is better to stop and walk away, do some training and come back with more experience under your belt.
The formula for calculating how much capital you need is:
The trade risk x the positions size x (100%/account risk %) = total capital required.
The amount of capital you need to swing trade stocks is almost always more than you think. But use the above formula, and you will know for sure how much money you need to swing trade stocks.
What are Realistic Returns for Swing Trading Stocks?
Your returns from swing trading stocks will depend on several factors:
- Your ability to swing trade stocks and experience – swing trading stocks isn't easy. It is not for the fainthearted. It takes time to master swing trading stocks
- Your capital balance – if your target monthly profit was, say, 10%, then $30,000 will return $3000. If your capital balance is $5,000, your monthly return will be $500
- Your ability to choose good stocks – you can use a stock screener to find good stocks. You want stocks with good volume and liquidity, or there's no point because the price won't move
When you are beginning as a stock swing trader, focus on improving your performance week on week. Overly focusing on the money shifts your concentration and can cause impulsive trading or over-trading. If you concentrate on becoming a better stock swing trader, the rewards will come.
Read Also: How to Successfully Swing Trade for a Living
How Many Stocks do You Need for Swing Trading?
It's not really about how many stocks you need for swing trading.
As we've discussed, how many stocks you can buy is dependent on the amount of trading capital.
$5,000 to $10,000 is the recommended amount of money needed for swing trading.
If you have $10,000 to use for swing trading, you can trade most shares at low risk.
How do I Find Stocks to Swing Trade?
Easy, quick answer. A stock screener searches for stocks for you.
What stocks are best for swing trading? There are multiple settings for a stock screener but always look for stocks with high liquidity and volume. To make a profit, you need a share price to move.
If liquidity and volume are low, the price will be static and unlikely to return a profit when you want.
Don't Miss: Best Swing Trade Stocks to Buy
Can I Swing Trade Stocks With $1000?
You can try.
But the likelihood is that your swing trading career may come to an abrupt end.
1% of $1000 is $10, which means you can only risk $10 per trade. That significantly limits your choices of shares to swing trade. Realistically, it makes swing trading stocks almost impossible.
If you really want to make an income from swing trading stocks, start saving up to allocate money to your trading account. Aim for a bare minimum of $5,000.
Meantime, open a stock simulator account and practice swing trading stocks. Become good at it, finding stocks you like and can trade successfully. Time spent learning how to swing trade stocks is valuable to assist you in becoming successful as a stock swing trader.
During this time, perhaps invest in a course for Swing trading stocks for beginners.
It is much better to wait a few months to save up your money than risk losing the $1000 and knocking your confidence in swing trading stocks.
Recap of How Much Money Do I Need to Swing Trade
It isn't easy to swing trade stocks.
But now, at least you know that it isn't practical to swing trade stocks if you have less than $5,000 to $10,000 to deposit.
Commissions are costly and can eat profits if you are trading with a small balance.
You are risking 1% of your account balance on each trade, so anything less than $5,000 restricts what stocks you can trade and how many stocks you can trade.
If your trading balance dips below your working capital, stop trading and walk away to reconsider your next move. Practice with a stock simulator for a while until you restore your confidence.
Please note that the above information is not providing advice on tax, investment, or financial services. We provide the above information without consideration for risk tolerance and a specific investor's financial circumstances.
Trading or investing in financial instruments such as stocks may not be suitable for all investors. It does involve risk and the possibility of a loss of capital.
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