Stock Swing Trading Techniques
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2. Good day traders, this is roger scott from market geeks and I have another video tutorial for you today. Last week I did a short video explaining relative strength and how to use it. I promised I would do another video to show you how to equalize your positions. That’s the topic for today. Before I begin please don’t forget to visit marketgeeks.com for your free swing trading report and don’t forget to subscribe to our channel for swing trading tutorials and more trading tips.
3. What Is Position Equalization and Why Is It So Important To Understand. Let me give you a quick example, Let’s say you trade stocks and you trade more than one stock at a time. Now let’s say for example that you trade two stocks using the same trading strategy. For the same of simplicity, let’s say you trade breakouts and you pick two unrelated stocks to avoid correlation. Your first stock is Clorex, the bleach manufacturer, here’s what the stock looks like before you enter your order to go long.
4. In addition to buying Clorex, another stock is also setting up for a breakout pattern and it happens to be an unrelated software company so there should be minimum correlation. You may have heard of this company a few times in the past too. They are the largest personal computer security company in the world. 5. One stock sells bleach and the other one sells security products for personal computers, totally unrelated which is great. Now we have to figure out the most important question, how many shares do I buy of each stock. 6. If you don’t make your positions equal, your profits and loss from each position will be different and your trading results won’t be balanced. For example, let’s say you have 7 winners and 3 losers, if your winners are $1.00 and your losers are $3.00, your trading is not balanced. Your losers and your winners should be
very equal in size to each other. This way regardless of what market you trade against another market, it will appear dollar wise like your trading the same markets. When looking at your brokerage equity report, the size of your winners and losers should be approximately even between your entire portfolio.
7. I know one trader who would bet 100 shares across all stocks but some stocks moved 4 points per day and others moved 2 points per day so his losers and winners were not balanced and there is no way to create a trading strategy when your positions are not equalized to each other. Just imagine you trade two stocks and the one you bet the least on wins the most, this is not what you want, you want each position to be as equal to your other positions as possible.
8. Here is the easy process that will help you trade any technique using balanced positions. The Tool that I use to equalize my positions is the ATR indicator. The ATR stands for Average True Range and it’s simply a daily calculation of the average trading range of each stock. You can figure out this yourself, but most trading software online and offline has an ATR indicator already build in. 9. All you have to do is set the Average Range to 10 days, it’s usually set at 14 days by default. The ATR indicator will tell you what the average trading range is for each stock that you trade. In our example, Clorex has an average range of .74 cents per day while Symantec has an average daily range of .43 cents. You can easily see that Clorex is almost twice as volatile as Symantec, so trading equal shares wouldn’t produce a very even profit to loss ratio between both stocks.
10. Start with figuring out how many shares you want to trade for most volatile position out of the two stocks. In our case, Clorex is clearly more volatile than Symantec, almost twice as volatile, so we will figure out how many shares of Clorex we want to trade first and then equalize Symanted to that level as well. To make this simple let’s say we want to trade 100 shares of Clorex stock and you
want to know exactly how many shares of Symantec stock will give you the same “bang for your buck” as Clorex stock.
11. Simply divide the larger position by the smaller position and multiply that number by the shares. In our example the larger positions ATR is .74 and the smaller positions ATR is .43. (You would divide .74/.43 = 1.69) and multiply the result by the amount of shares you chose to trade the more volatile stock. 3. Since 100 shares were chosen for Clorex stock, you would multiply 1.69 * 100 shares = 169 shares of Symanted stock for every 100 shares of Clorex Stock.
12. Many traders focus so much on being profitable, that they completely ignore the most basic and important principles such as making sure both positions have equal risk and reward profile. Regardless of the stock swing trading techniques you pick, you need to make sure your trading apples to apples and not apples to oranges. Take a look at how both trades would have worked out for you.
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Notice how the volatility changes as both stocks rise. Volatility needs to be adjusted as both positions will increase or decrease in volatility. Both Clorex and Symantec have different ATR levels than when we entered the order. A good practice is to recalculate your ATR every few days to make sure your positions are as equal to each other as possible.
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That’s it for today’s tutorial, please don’t forget to visit marketgeeks.com for your free swing trading report and subscribe to our channel for swing trading videos and trading tips. This is Roger Scott wishing you the best in your trading.
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