Tuesday, October 04, 2005

The Best of Both Worlds

Yes, it’s a great Van Halen song. It also is a way you may wish to trade in order to reach your goals while minimizing stress, particularly during certain market conditions. I’m talking about blending day trading and swing trading into a stock trading strategy that can produce trading profits for you and let you sleep.

We’ve talked about finding a trading strategy that suits your personality, as well as when to day trade and when to swing trade. When the market is choppy or volume is light, you may wish to employ a day trading strategy. When market moves are smoother and a bit more predictable, a swing trading strategy may suit you best. How about a little of both? Why not blend each style in a way that provides profits on multiple timeframes? I’m all for it.

Sometimes the market road is a little rocky, but you want to have some exposure on. While you could simply enter half-size positions, you could enter the full position and trade it in a hybrid fashion. Why not enter the best technical setups with a full position on, and take half off as a daytrade to scalp the initial move? Then you can keep a half position for further exposure to a potentially larger and more profitable move. This way, you can pocket some profit and still sleep at night while you wait for a larger move.

I select stocks for my stock pick service which are set up for initial moves (ideal for the day trader) yet look good for swing trades (multi-day moves). Employing a hybrid trading strategy which takes into account the best of both worlds means that when a trade triggers by hitting the stated entry price, the trader can scalp the initial move and offer into strength on the first move up. For some stocks this may mean a quick pop of 30-50 cents, or it may mean a gradual, steady move up of a point or more. The point is, part of the trade is put on with the intention of selling into initial strength (or weakness if short). After the first wave of buying begins to slow down and the position is pared back to smaller size, some rest or retracement is likely but this move will not erase much of the paper profit that the remaining position is showing. Smaller size allows the trader to endure such pullbacks, waiting patiently for a larger and more profitable move over the coming days or weeks.

Trading a hybrid style helps to minimize losses on trades that don’t cooperate. The portion of the trade which was put on for a day trade will naturally have a tighter stop (maybe 1% or so), and if the swing portion of the trade is also stopped, the combined loss is significantly smaller than if the entire position was stopped out as a swing trade. Keeping losses small is the name of the tune, so this strategy is great for helping to minimize losses while seeking to book more frequent gains.

If there are a hundred ways to skin a cat, there must be 1000 ways to trade effectively. The key is to find the approach that works best for your unique situation. Utilize a strategy that fits your personality and your timeframe, and then be willing to adjust it if needed. If you need to take the best of day trading and swing trading in order to achieve your profit objectives and wake up each day stress-free, then perhaps the hybrid approach is for you. The market will open tomorrow, so you better be ready with your game plan!

The Stock Bandit


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