8 Deadly Laws that I follow while Swing Trading

Rules are a part of every game. Without rules, how can we even progress? I’ll share 8 rules that I strictly follow while swing trading. Every trader should keep these in mind before investing/trading. So, let’s begin!

1. Read Charts with 80–20 formula

I majorly take positions in Mid-Caps or Large Caps but not a rigidity of any sort. Sometimes small caps brings a lot of opportunities with them, depending upon the market cycle. But, the risk might have an upper edge due to their inherent downside pull, if the longer time frames are bearish.

This is why, to become efficient at swing trading, there’s no other alternative than reading charts everyday.

80–20 formula in this case simply means that 80% of the charts that you scan should be from mid caps/large caps, atleast in your beginning phases of your trading journey, and the 20% could be from the small caps. As and when you get experienced, increase this domain because you’ll start to understand the more volatile small cap charts as well.

2. Risk:Reward

This is one of the most important things one has to remember before entering a position.

Some trades are not worth it because the risks might outweigh the reward. It is therefore important to measure the risk & reward before executing a trade.

The psychology that you should create is to not have FOMO about any stock. There are always plenty of fishes in the sea. It’ll take some more efforts to find the most suitable one for you. Just because people are in a hurry to enter the trade, they end up with a portfolio reaching new heights to the downside everyday!

“You never know what kind of setup market will present to you, your objective should be to find opportunity where risk reward ratio is best.” ― Jaymin Shah

Remember, RISK < REWARD

3. Spot and draw trendlines & patterns

One of the most important skills in an excellent swing trader is the ability to spot and draw patterns.

The trendline acts as support and resistance. The zones where buyers and sellers accumulate in the market. This price action technique is the most important skill along with drawing patterns which includes some of my favourites like :

• flag & pennant
• head & shoulders
• cup & handle
• Triangle & wedges

4. Time frame

This is one of the major aspects which a trader misses often. It would certainly lead to executing wrong trades due to mistakes in the time-frame selection.

I believe in the fact that as and when the time frame increases, the price action and patterns work more efficiently.

This is why I generally use 1 week chart but refers 1 day as well. It’s the most suitable time frame that I’ve discovered for myself. Maybe, you could choose whatever that suits you. The 2 major reasons for choosing this time frame are:

• Trendlines & patterns are respected
• Gives a huge edge in the risk reward ratio

5. Stress test strategy

There are lots of potential risks when you trade & which might be uncertain at the time when you’re executing it. The risks may include your analysis being wrong at the time, negative news, profit booking level in the market, overall market sentiments or a black swan event.

This is the reason why I always have a plan even if my portfolio go upto a 50% to the downside, although it has rarely happened and when it did in 2020 March, I managed.

The strategy could be related to averging out, selling or adding some units, hedging using options and so on.

6. Eggs in different basket

In swing trades, you should have a proper mechanism of distributing your investment via certain number of stocks than putting all the money in one.

This helps you to minimise risks between all the stocks. The cons from this approach is that there is a possibility that your returns would be limited.

However, I know I’m in this for a long time, and don’t wanna blow up my account by speculating on one aspect of a stock.

For example, You have 3 open positions with equal amounts, and one goes -10% and the rest 2 are 2% up each. Even in this case, your loss is just 2% overall. Imagine just having that -10% open trade.

7. Exit plan

Exiting on profit is the ultimate aim of every swing trader. So, it is extremely important to create a mechanical process in order to attain those. If you keep moving up your target due to greed, you won’t be able to exit when the market falls, and it would be too late.

So, even when you enter a position, it is equally important to have a target so that you can know your reward percentage and everything is clear about the trade that you just took.

I generally fix my target price when I enter a trade and have a unique strategy to find the target price. You can create your own as per your strategy so that emotions doesn’t come into play.

8. Market Psychology

This is one aspect which people leave out or doesn’t give any importance while creating strategies or executing it.

My aim is to be mechanical and not to be emotional. This is because emotions will ask me to exit the position even when I see a 2%/5%/10% downside from my buying level.

Stock swings are normal and nobody can do bottom fishing (to buy at the lowest point). You have to remain invested in your idea or the mindset you had while you executed unless and until something has significantly changed. If you have a SL, follow it rigorously. Otherwise adopt other ‘stress test plans’ as mentioned above. In any case scenario, scrap your emotions.

“Reaching any goal in trading requires specific domain knowledge and technical skills. But then, after that, it’s all mindset management. Yet most people ignore that — they automatically think they have that last part all figured out, and it’s a mistake.” ― By Yvan Byeajee

Like it? Clap it!

You can follow ‘The Green Arrow Trading’ on Instagram as well. I’m a professional swing trader and a long term investor. I also conduct 1-on-1 sessions on A to Z of stock market with a focus on technical analysis and swing trading.