Trading swing stocks can be a good way to earn profits, provided you know how and what to look for. Many traders make the mistake of thinking it as a way of getting rich quickly. Nothing can be more dangerous than venturing into swing trade without due preparation.
You must know how to swing trade stocks and how to spot good stocks before you start trading. One of the most common questions traders looking to swing trading is how much money you need to get started?
The amount of capital you’ll need depends on the strategy you use, your risk capacity per trade, and your position size, among others. If you are looking forward to trying your hand in swing trade, read on to understand how much you need to invest without risking too much.
Read Also: What are the Pros and Cons of Swing Trading?
Markets you can swing trade stocks
Swing trade refers to taking a position that could last a day to a few weeks or even a couple of months in case of some traders/trades. The duration of a swing trade depends on the strategy of the trader as well as the expected returns.
However, generally, swing traders hold their positions overnight unlike the day traders who close their positions before the market closes for the day. The idea is to gain profits from the momentum, where you can capture as many movements as possible in the shortest period. Once the price momentum stops, swing traders would move on to other opportunities.
Swing trade is popular across all markets and is not restricted to stock trade alone. It is practised in other markets such as forex, futures, and options. Let us try to find out how much money you need to swing trade.
Factors influencing your capital investment
The needs and goals of every trader differ from one another. Hence it is necessary to understand certain factors that influence the amount of money you need to have for swing trading.
Swing trade can bring you lots of profits, but it is a high-risk investment. Your strategies might vary, but you should have a solid risk management plan under your belt. Before you determine the amount of money you will put into swing trade, you should understand how much you are willing to risk on each trade. Your position size will be based on how much you can risk as capital.
All experienced traders would advise you to not risk any capital you can’t afford to lose. Even if you can afford to lose some, it is recommended not to risk more than 2% of the account capital on a single trade. The ideal scenario would be risking 1% or under. So, if you deposit $10,000 in an account, you can risk $100 or a maximum of $200. You should determine which suits you better and note it down. This is the account risk you can afford to take on your account on each trade.
There is also trade risk, which is set using a stop-loss order. It is the mechanism for you to get out of a losing position at a particular price. Your trade risk and account risk determine your position size. It can be mathematically expressed as:
Position size = Account risk ($) / Trade Risk ($)
Understanding the position sizing is the key in determining your capital requirement.
Money needed for swing trading
There’s no minimum capital requirement to be a swing trader. Although day traders are obliged to maintain a minimum $25,000 balance in their account, there is no such obligation on swing traders. However, if you are swing trading, you must make sure that you don’t end up day trading a lot, because if you do so, you’ll be subject to this minimum.
The formula to find the capital is
trade risk x position size x (100%/account risk %) = Capital Required
Again, as mentioned above the capital you need depends on your position size, your account risk, and your trade risk. However, you can trade on margin as well. Stock market allows swing traders to have up to two times leverage. It means that if you deposit $20,000 you can purchase up to $40,000 worth of stock. Account risk is always based on the capital deposited, not the leverage amount.
Determining how much money is needed for swing trading
Based on the above guidelines you can determine the amount of money needed for swing trade. Ideally, you will need at least $5,000 to $10,000 for swing trading. Even if you risk 2% of your account per trade (at least $100), you will need at least $5,000. The calculation is as under:
0.02 x $5,000 = $100.
If you wish to keep the risk lower at 1% per trade, you will need at least $10,000 as per the same calculations (0.01 x $10,000 = $100).
However, these amounts enable you to trade in most stocks, including expensive stocks.
Accordingly, if you have a $5,000 account and wish to buy a stock at $200, your stop loss placed at $190. It means that your trade risk is $10, and you are prepared to risk up to $100 on the trade (account risk), which is 2% of $5,000. In such a scenario, how many shares can you buy? Since your risk is $10 per share, you can buy 10 shares before you hit the $100 you are willing to lose. (10 shares x $10 = $100)
If you have leverage, you will still have room to take more trades. In effect, the leverage gives you $10,000 in buying power even though you have only a $5,000 account.
The same principle works on lower-priced stocks as well.
So, in effect, with $5,000, and a willingness to risk 2% per trade (or with $10,000 and risking 1% or 2%) you can swing trade efficiently. As the same concepts apply to a $100,000 account, you can utilise more capital in the same manner.
Most of the swing traders follow this basic rule of thumb and start swing trading with an amount ranging from $5,000 to $10,000. Anything lesser, you may end up risking too much on each trade.
Under-Capitalisation in swing trading
Having more capital in your account is better than undercapitalisation. Be wary of the fact that in the stock market under-capitalisation can easily happen, especially to new traders. As mentioned before, it makes sense to risk at least $100 per trade. However, if you risk $100, what happens if your account balance drops to $4,000? If so, you will be risking 2.5% on each trade. And if things don’t go well, your balance will drop even low, and you will be risking more per trade.
Hence, if your account balance drops below $5,000, you must ‘Stop trading’. This is because you cannot afford to lose $100 and maintain the account risk to less than 2%. So, whenever your balance falls below a certain level, even the initial 1% risk will grow into more, thereby increasing the overall risk.
In such a scenario, you must top up your account to bring it back above $5,000 or opt-out of the trade.
Can swing trading make you richer?
Swing trading can be a profitable business if you know when and how to trade. However, it is not a shortcut to getting rich. In fact, if you are not careful enough, it can render you poorer.
Bear in mind the following:
- Trading is risky. Even with a stop loss, you can lose all your capital and more.
- It makes sense to risk at least $100 per trade. If you risk a lower amount per trade, the commissions could add substantially to your loss, or erode your profit.
- Never risk more than 1% or 2% of the account per trade.
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