Welcome to The Stock Market millionaire, episode number nine. Today, we’re going to talk about Getting Started with Swing Trading. My name is Robert Roy, the founder of WealthBuildersHQ.com, A=and I’m excited that you’re here with us today.
So first off, what is swing trading? Now, we’ve already done an episode on day trading, which was episode number one, make sure you check it out as a comparison between the two, but a day trade is much different than a swing trade. A swing trade is where you enter into position with the intent of holding onto that for X, and X being much longer than a day. And, when I say much longer, caution needs to be thrown in there. For me personally, for Rob, it’s somewhere between three and 30 days is what I like my swing trading to do – with an ideal timeframe for me of somewhere around that seven to 10 day time period – is what I am looking for.
And that’s for the majority of my trades. And, the way that we trade by utilizing what’s called a “runner,” where we exit out in scaling fashion, meaning we don’t get out of the entire trade at the exit -we get out of some, then a little bit more, then a little bit more – and then the last bit of our contracts there. So, we have exits that either span over, on our standard swing trades, either four exits or three, potentially two – depending on the type of trade we’re doing – but four and three are a more common one for us. For me, hence called my 4-3-2-1. So a swing trading is nothing more than entering into a trade and holding onto it for a shorter period of time than an investor. So if you look at a day trader, I’m intraday. I’m in and out today.
You look at a swing trader – my definition, and you may find different ones on the internet, you may find have your own opinion of what a swing trader is – for me, for Rob, my definition is somewhere between three and 30 days, right? And as an investor, it’s one of like a couple of months to a couple of years. So there’s a little bit of a difference inside of that realm of what type of trader you are.
Now, when you look at swing trading versus day trading, there are some very important distinctions between them. And again, in episode number one, we did one, I did one on day trading, so it’ll give you a good comparison. If you haven’t listened to that, by all means, go back and do so. But when you compare a swing trader to a day trader, there’s not a lot of differences. You may have some variations in the rules for entering into your trade – we do – but it’s not really the entry rule for me; it’s more of the exit rule that has a difference to it. Because we’re not looking to hold overnight, we’ve got very specific goals, guides, rules of what we’re looking to accomplish in there.
In other words, if I am looking at a trade as a swing trade,r and the stock goes down a little bit, my stop will be further away as a swing trader than if I am a day trader. I can’t let my stock go as far down intraday; I’ll get my head handed to me on a regular basis. But, as a swing trader, I’m trying to make bigger profits, I have to take a slightly bigger risk. I’m not saying being riskier; we still put the same risk profile and everything that we trade. The importance is understanding there are slight variations to it.
When I am day trading, I am trading an option that expires this week – could be today, could be in a few minutes – it expires. When I am swing trading. I’m going out at least 30 days on my options, 30 to 60 days, somewhere in that range of what I’m looking for.
So, there’s not one right or wrong way to trade. With a day trader the great thing is you’re back to cash at the end of the day. Yes! I don’t have to worry about the overnight stuff; I can sleep just fine tonight. That’s awesome. But, what you do miss as a day trader is the runs, right? The long runs, the big hits, the home runs that come six, eight, 10, 12 times a year, You miss out on those. And they could make your entire year, you know, the, the 80/20 rule, some of you are familiar with it, not in trading just generally. (Don’t go looking up “80 20 rule trading.” No, no, just 80 20 rule.) 80% of all your customers. Let me rephrase that. 20% of all your customers will give you 80% of all of your business, right? 80%, 20%. It’s no different here. 20% of your trades will give you 80% of your profits for the year. You can have great swing trades, you can have great day trades. You can have a day trade that let’s say on that average on a day trade you’re pulling in (I’m making up numbers now) $1000. That’s your average day trade. And then today, you have a day trade that you make $4,000. Man, that is awesome. Home run! Well, if you’re a swing trader and your average swing trade is $4,000 and you hold onto that position and you hit a home run and you hit $40,000 it’s a lot different there than the $4,000.
Don’t get me wrong – rate of return, reusing the money – I get all of that; but, I get to capitalize on massive moves that, as a day trader, might not give me the opportunity to get back in. So what does that mean? If you enter a day trade today and you exit by the end of the day, and then tomorrow the same stock gaps up and you look it and go, “Oh man, it’s tough for me to take an entry on that trade now.” Yeah, it’s moved too far. Let me see if it pulls back…” And never does. It just continues to run the rest of the day. You miss out on those types of opportunities because you got out of the trade yesterday already – because you’re not holding overnight. Now, the other side of the coin is if it got down on a swing trade, right, and goes against you, if it was a day trade, that never would have gapped down against you because you were out yesterday.
So there are some goods and bads to it. And I don’t believe you should pick either one. I think you need to trade both. Our system produces abundantly well with both strategies, but when? In other words, the first couple of months of this year, our day trading strategy crushed it, crushed it compared to our swing trading strategy. Had I only been swing trading, I would have missed out on the opportunities to take those types of trades.
So when is a good time to do swing trades. All right. So when we talk timing, I want to make sure that we’re clear. I don’t mean 09:37:14 AM. I am going to look a little more general. I like to place my swing trades in the morning after the market opens, maybe five, 10, 15, 20 minutes after the market opens, preferably somewhere inside of that part of the day. And, it all depends the setup. I can prefer to enter there; that doesn’t mean I am. “What do you mean?” What if the intraday chart doesn’t give me what I want? We have rules that we put out there and calls and we make in some of our advanced strategies in things like our Power Option Plays, where I will tell you “buy AAPL at or above $137 a share.” So if Apple opens up today at 136 and just meanders there and never really moves, I can’t get in at 9:30-9:50 in the morning. It’s impossible. Why? Because Apple hasn’t hit my target yet for my entry rule.
So there’s an ideal and there’s reality. And if that’s the case, if I watch and I’m sitting there and I did not take my entry and I still like Apple as a potential trade, I’ll put an order in right now that says, “Hey, if AAPL gets to 137, 142, whatever, the number is, AAPL gets to 137, boom, go ahead and buy.
Now whether we’re buying options or stock, it’s a whole different ball game that we’ll talk about in there, right? And that’s actually the next bullet point that I want to go through is…
Swing trading options versus stocks, or options or stock. Swing trading options to me is a no-brainer. Options over stock are definitely more of a cost concern. I could put a lot less cash into it. I could trade more active stocks, but you can’t generalize it and say, “options are better.” It’s not the truth.
If I am trading low price stocks, if I am a momentum trader and I’m chasing after day trades as an example, and I’m chasing after that momentum on $5 and $6 stocks options might not be a better choice. You might; it just depends. If there’s enough open interest, it depends if there’s enough volume in there. If the Delta works out for me, if the bid-ask spread is okay, if the increments work, there are other factors. Yet, when I look at an Apple, when I look at a Google, when I look at a Netflix an Nvidia, an Adobe, I don’t have those concerns, those issues. I have none of that to worry about whatsoever. I get to trade those bigger stocks with options versus trading the stock, the equity itself.
The other side of the coin is playing the downside means you have to short stock. Short stock means selling something you don’t own. Stock’s trading at a hundred; you think it’s going down. You sell it for the $100; the broker gives you the a hundred dollars. At some point, you have to give it back, right? You’re obligated to put the stock back in the broker’s account. Well, the stock goes down to $90. You sold it. First order you did was a sell. You sold it at a hundred dollars, it dropped to 90. Now you buy it back. Well, if they gave you a hundred and you took 90 of it and you bought the stock and you gave it back to the broker, you kept $10. That’s great.
How much can you make in that trade? $100. We didn’t go all the way down to zero. You’re right? How much can it go against you? Um, right. Infinite.
How high can the stock go? Ooh. So there’s an unlimited risk with the limited profit. Doesn’t mean it’s a bad trade. I’m not, poo-pooing it. I do short stock times. I don’t hold overnight with it normally – I am shorting intraday, not overnight, but I can buy options instead and alleviate some of that. So I can take advantage of downside moves, not just upside moves.
“What are the best stocks for options trading?” is a question I hear all the time for my students. There’s not a best. The best stocks for options trading are the ones that fit your personal risk profile, your own risk tolerance. In other words, if you put an options trade on Amazon, which I love Amazon love trading Amazon. If you do an options, trade on Amazon, and you go to bed tonight, and that trades still open (because we’re talking swing trades today), and that trade is still open and you can sleep at night. You’re kind of, freaking out, wide-eyed, and you’re just like, “Oh my God, I got all this money in this trade. I hope the market opens. Okay. I wonder what the European market’s doing right now. Am I going to get my head handed to me?” If that’s you, then Amazon’s not the stock for you.
So, find a price range of stocks that fit your risk profile that you’re comfortable with. And I don’t just mean the stock price. You need to do the investigation on the options. For me.,I love trading big name companies. I do tend to trade more tech than I trade others. You know, if you look at the top of my list is Amazon, Google, and Booking. Those are my top three on my list. There’s also Tesla. There’s Chipotle Mexican Grill, another thousand plus dollar stock, at least as of the time of this recording, there’s Netflix Nvidia. I like these higher priced stocks, but I can trade a Netflix for a lot less money that I can trade an Amazon for. But, you could trade Apple for a whole lot less than that. It all depends where your risk is in the position. Find companies that fit your risk profile.
Now I hear this one all the time, “Rob, can I swing trade options for a living?” Yes, it is possible, but I don’t want any of you to think…wait a second. When I was in Amway a million years ago, the first time I got brought in, which was by a high school teacher on graduation day, Jack Hoffman pulls me aside and goes, “Rob, I need to talk to you. I’ve got a business opportunity for you.” Great. We go in his office and he pitches me on Amway. My mom’s waiting outside from my graduation.
I come out, she goes, “what took so long?” I said, “I need a check for a hundred bucks.” “What are you talking about?” “I got to give it to my teacher.” “Why did you not pass your class? No, no, mom, I passed my class. I’m good. Graduation was real.” I said, “I just started this business!” Right? And people that were in Amway would quit their jobs, buy the Winnebago, their RV, before they ever sold that first box of SAA, which is soap white powder and plastic bags, and that’s not what I want you to think of this year. You’re not quitting your job to trade options for a living. Don’t do that. Swing trading options for living as possible, but not at the expense of “I’m going to quit my job and be under all of that stress.” So, I want you to be at a point where you’re trading the market and you’re comfortable. You’ve built up a reserve of six months or a year of cash, That, in case the market goes against you, you’ve got enough to cover you.
I’ve seen it time and time again, where someone quits their job and they didn’t really have enough. They’re available to live off of, and one or two months go bad and they’re kind of back at looking for that job all over again. We don’t want that. We want retirement to be a forever deal. So, look at it as “it can be done, but you first need to understand the how.” And you know how it all starts with hitting the first practice trade, enter button on your keyboard for the very first practice trade that you’re going to do. Your non-funded trade. That’s where it all starts. The more practice you do, the better you become. The more practice you do the quicker you’ll be ready to start trading for real, the more you focus on trading for real, the quicker you can get to the point of swing trading options for a living. All right there, you have it. Ladies and gentlemen, you stay focused on the quest to becoming a great trader. Keep crushing it. And remember, remember you’re just one trade away. I will see all of you at our next update. Take care and I’ll see you soon. Bye.