But the really beauty of the methodology of swing trading half our shares of a position and holding the second half, for hopefully larger trend following gains, is that it pays for a lot of the churning and chopping that our trading accounts go through while minimizing the dangers of overtrading at the same time. Just one or two gains a year of 50%, 75% or even 100% or more by following the trend with half our position pays for a lot of that chop and then some. These types of gains, if we can attain them, during the course of the year really pad our average winning percentage and limit the amount of trades we need to make to achieve our goals. A look at the math should clear this up and drive home the point.
Trader #1 averages 10% on his winners and 5% on his losers. His win/loss rate is 50/50 and he devotes $5,000 to each trade and makes 100 trades for the year. Assuming these numbers Trader #1 will net a profit of $12,500.
Trader #2 has the same 50/50 win/loss rate and likewise devotes $5,000 to each trade. However, he only averages 5% on his winners while responsibly cutting his losses at 2%. This trader will need to make 167 trades for the year to equal trader #1’s profit total.
To put this into perspective, Trader #2 by making 67 more trades forced himself to make 134 more trading decisions as each trade includes a buy and sell decision. Over the course of a long trading career that’s a lot of undue stress. I don’t know about you but I’d much rather be Trader #1. It is true that we don’t always have cooperative markets that make it easy to log large gains on individual stocks in any given year, but we still must make every effort to maximize our winners to the extent that is it reasonably possible.
-CJ Agresta, Trust The Process Trading