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If you’re asking the question, “should I swing my option trade?” then you need to consider these 9 questions why before making the decision to begin swinging. Let’s dive in.
We’re going to be taking a look at some key questions to ask yourself before swinging your contract on this guide.
We’ll be examining three great reasons to swinging your trade… and four not-so-great reasons. Now, let’s dive in!
If one of these reasons (or even better, several of them) sounds like a match for your reasons for swing trading, then you’re in a great position to succeed.
The power of compounding can be powerful, especially on a single swing trade. Imagine if your contract goes up in value 20% in day one, and another 40% in day two. That’s a nice 60% return in just a single trade.
To compliment reason #1, let’s say you can put more money upfront if you chose a monthly option contract over a weekly.
You do less work, and have more time to do other things you love to do.
Let’s, say you have a great day trade that is up 30 to 40 percent up, and you took majority of your profits. You have a couple contracts that can go to breakeven. Mathematically, this wouldn’t hurt you because the trade will be positive overall.
While all the above reasons are great motivations to start a swing trade, there are plenty of other reasons why might be thinking of starting a swing trade.
If any of these next few reasons ring true to you, I highly advise to think a little bit more before diving in.
Don’t heed this advice and you’re much more likely to end up disappointed when your expectations aren’t met–or the going gets rough and you’re not deeply driven by your swing trade isn’t going the way you wanted to in the first place.
This is always a top reason why I wouldn’t swing trade my option contract. Stock movements, are unpredictable and can move up, down or sideways.
If the stocks move sideways or moves in the opposite direction, the premium of your contract is going to get killed by Theta.
High Theta is the #2 reason why accounts get slaughtered in the market. Option contracts usually have higher Theta in weekly versus monthly contracts.
Let’s be honest, there are plenty of traders who get into this line of business primarily for the money–and I’ll be the first to tell you there’s nothing wrong with that.
It’s important to realize though, that trading is not a “get rick quick” scheme.
Many traders–even successful ones–love to play company earnings, because of the wild returns one can make.
Instead…
Rather than seeing an earnings trade as a way to bring in tons of money fast, don’t trade it and stay away from the gambler mindset.
As a trader, we’re here to take trades with high returns, low risk while protecting our capital. You may get lucky with a couple earning trades, but that’s just a recipe for disaster.
During volatile times, where good news is bad for the stock market & bad news is good for the stock market, trades can flip on you on a dime.
Instead…
To not risk losing profits on a green trade, take profits, and find another trade setup the next day. There’s no need for you to risk and turn a green trade into a red trade just because some wild story came out the following morning before market open.
There are plenty of publicly traded companies out there that are shorted heavily, and are considered penny stocks.
A lot of retail investors will gamble their hard earn cash in hope for a short squeeze.
Instead…
Stay away from heavily shorted stocks that don’t have even the basic fundamentals of a great company.
When you invest your cash in well sounded and stable companies, you’re less likely to lose your trade position over a volatile stock.
So you think you have some good reasons for starting a swing trade? Should you go ahead, or are you going to end up taking your profits before market close?
Here are nine important questions to ask yourself before you even decide on swinging your trade.
Every one has a minimum profit taking percentage and a stop loss percentage on their trade.
You need to ask yourself, have I met my first profit percentage, if not, are you close to getting stopped out on a trade.
It’s important to think if you’re okay willing to risk your profits for the next day.
If you’re not at all comfortable with swinging your profits, then you probably don’t to swing trade your contracts.
Trading is all about profits and losses. As a trader you want to be profitable as much as you can, and that means minimizing risk on your trade from turning red.
Every day that goes by and the price of a stock is not moving closer to your price target, Theta will eat up your contracts premium–unless you’re swinging equity.
You need to unbiased about your trade, and let the charts guide you. Do you have enough time on your contracts?
If you’re feeling a bit wary about your trade because you have a week or two left, it’s okay to close your position. Remember, the #1 goal in trading is to protect your capital.
Part of getting into a swing trade is to do your own due diligence on a company. What events or catalyst are coming soon to a company that will make go up or down.
It’s important to do this research prior to getting into swing trade.
As a trader, it’s important for you to also do your technical analysis on a stock. Depending on whether you’re shorting or long, make sure the charts are representing that with patterns that will favor your trade direction.
You need to check if the stock is near a Supply or Demand zone–or if it’s forming one. You also need to check if the candlesticks are forming a pattern that favors your trade.
Price Action is king, and you want to make sure that it’s closing strong on the side you favor. If not, it may be signs that it’s losing momentum to your calls or puts.
Stocks do not only move in one direction. Buying and selling do get fatigued. It’s a great idea to revisit the RSI or the MACD indicator to see how what the overall trend of the stock, and to check if it’s overbought or oversold.
During volatile markets such like in 2022, there were plenty of world events, reports, and meetings that reversed a lot of stocks.
I like to tweet about stocks and post helpful swing trades. Follow me there if you would like some too!