What if we told you that a swing trader who picks the right stock just 55%-65% can be hugely successful? That is, if just one out of every two of your swing trades earn money then you can make a lot of money over time. However, it is also possible to be right 80% or even 90% of the time and still go broke. All it takes is one or two big losses to wipe out all of your hard-earned gains. The difference between a successful swing trader and a failed swing trader has as much to do with how risk is managed as it does in making good stock picks.

In fact, a good swing trade money management, or stop loss strategy is just as important as picking the right stocks.

How a Good Stop Loss Strategy Can Make a Big Difference

We mentioned above that if just 50% of all your swing trades pay off you can be wildly successful in the markets. Let’s take a look at the numbers and see how this works.

For the sake of simplicity, let’s assume you buy $10,000 worth of stock each in four different companies. Now let’s assume that you use a simple money management strategy in order to control the risk in your swing trades.

The rules for your swing trading strategy are as follows:

Rule 1: If the price of the stock moves against your purchase price more than 3% you sell and take a loss.

Rule 2: If the price of the stock moves up 10% you sell for profit.

Now, let’s see if this is a profitable swing trading strategy. We will assume that two of your swing trades move up and two fail; the same odds offered by a coin toss.

Stock 1 = $1000 profit

Stock 2 = $1000 profit

Stock 3 = $300 loss

Stock 4 = $300 loss

Total = $1,400 profit

So we see that indeed, this is a successful stop loss strategy. The numbers of course can be changed and it is not necessary to take profit at 10% for long term investors. One might simply just decide to adjust the sell price higher and higher protecting profits while allowing the price to continue to enjoy gains.

Moreover, one might also wish to use a wider margin of error in order to accommodate market volatility.

The bottom line is, if you earn more money on your successful swing trades than you lose on your unsuccessful trades you ensure that your swing trade account is always moving forward and never slipping back.

That’s a whole lot better than seeing your swing trade account wiped out in just one or two bad trades is it not?

Author's Bio: 

SRS is a one-stop solution provider that helps traders and investors maximize their returns from the markets with the help of a daily swing trading strategy and stock trading.