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Common mistakes in swing trading
As we have arrived at the end of this module, it is time to get started with swing trading, but before that, here are some common mistakes that should be avoided in swing trading.
1. Using too many tools - Use of too many conflicting tools may result in spurious outputs & confuse the trader. Rather technical analysis along with use of back tested indicators should be preferred.
2. Trading in the wrong time frame - Swing traders aim to find price trends over a given period and trade to benefit from the trends. Analyzing Smaller time frame candlesticks such as one minute, five minutes and fifteen minutes will not yield desired results as these time frames are too short for any trend to play out and are hence suited specifically to day traders.
Generally swing traders start with daily charts to identify primary trends and then use other time frames to validate whether their identification of trend is correct.
3. Not putting stop-loss - Swing trading works on a strict risk-reward ratio. Failure to set stop loss renders the strategy prone to heavy losses. Remember, Capital protection is more important than its growth. Thus, swing traders should put strict stop loss to prevent erosion of capital.
4. Trading on news/events - Swing traders should follow their predetermined strategy and should not make unnecessary changes to their trade setup based on market news and events.
5. No backtesting - Every strategy should be thoroughly back tested for historical validation. Not every swing trading strategy works on every stock, not every stock responds to moving average crossover in the same way. Hence it is important that traders back test their strategy with indicators on the stocks they wish to trade.
6. Allocation of capital per trade - How much capital to use per trade is a personal decision, however disproportionate allocation of capital on one trade should be avoided.
Mr. A has a capital of ₹1,50,000.
He contracts to buy one futures contract on the stock of Reliance Industries @ ₹2,000.
Total capital invested (Margin Required to enter into the trade) = ₹1,15,000
In the above case, more than 75% of Mr. A’s capital is tied up in a single trade.
This cannot be considered a good trading strategy. It is advised that traders judiciously allocate capital across trades and do not put all their eggs in one basket since if this particular trade does not work out as planned and hits the stop loss, a significant portion of the total capital will be wiped out.