Swing Trading Lessons Learned in 2016
Successful traders are constantly learning, and 2016 gave us our fair share of swing trading lessons to implement and add to our trading arsenal in a year that was full of unexpected events.
Let's call 2016 the year of the surprise. The three biggest surprises were 1) the commodities boom 2) the British voting to exit the European Union (Brexit vote) and 3) Donald Trump beating out Hillary Clinton in the U.S. presidential election. These are events that were almost impossible to predict and proof that the best-thought-out trading plans rarely play out as expected. Thus, the trader that knew how to trade and adapt to market conditions is the one who succeeded in 2016. Each of the aforementioned unexpected events led to great trading opportunities as we continually adapted to the market and ended the year up over 45% in the Trade Alerts Service.
You can be sure that 2017 will present more profitable surprises. As long as we take our swing trading lessons learned and apply them, this will lead to another great trading year.
2016 Swing Trading Lessons Learned
1. Trade aggressively when there is a market catalyst. This was the year of the catalyst. The four major market catalysts were the early 2016 "W" breakout, the commodities run, England's Brexit vote and the post-election "Trump Effect." Trading aggressively during these periods led to a good chunk of my 2016 profits.
2. Trade conservatively once the market slows. Traders always want to trade, but when the conditions aren't optimal, it's best to sit back and take it easy. In 2016 this was most evident during the period in between the big Brexit reversal and the post-election run up. Lots of grinding that led to it feeling like we were trading in quicksand.
3. Trading volatile markets leads to account volatility. Volatility is a trader's friend, but it also leads to wilder swings in the trading account. Expect big runs and drawdowns. The key is managing risk and making the drawdowns smaller than the run ups.
4. Ignore the win rate. You don't need a 70 percent win rate to be a successful trader. In fact, often the higher win rate means you are trading poorly because you are taking smaller than optimal profits to reach that win rate. My win rate in 2016 ranged between 45-60 percent in a year that saw +45% gains.
5. Try it again and re-enter strong setups. Observant traders noticed that while 2016 was the year of the "fakeout," stocks often came back strong and gave another valid setup after the initial failure. Re-entry led to big profits.
6. It's all about sector analysis. During different periods of 2016, we saw explosive runs in commodities, semiconductors, biotechnology, defense, Russia, Brazil, energy and finance. The company didn't matter. Neither did the setup. If you picked a stock in the correct sector you minted money. The sector was all that really mattered.
7. Nobody cares about fundamentals. Piggybacking on the last point, fundamentals meant nothing if the stock was not in the right sector. A number of strong big tech stocks posted blowout earnings only to see their stock prices fall because they were not in the "sector of the month." Yet stock prices soared for crummy companies in the right spot at the right time.
8. Let the gift keep on giving until it doesn't. It paid to keep going to the well until it ran dry. Hot momo sector stocks gave us setup after setup. Stocks like X, FCX, NVDA, UCO and JNUG gave multiple entries, both long and short, throughout the year.
9. The pump and dump is back. This was especially true during slow periods in the market. Low float junk stocks would come to the forefront and make insanely spectacular 1-3 day gains before coming back to reality once they were dumped. They were trading vehicles and nothing more. It was not uncommon to see a junk stock run over 100% in 1-2 days. The best example was the November run in dry shipping stocks like DRYS, ESEA, TOPS and DCIX.
10. Trade the junk but make it small and quick. The aforementioned junk stocks were best handled as intraday trades, however, nimble traders could swing them overnight if they already had an intraday profit that acted as a "buffer," were particularly skilled, and made sure to trade them small.
11. Wait for strong signals when trading extended countertrend stocks. As pointed out before, 2016 was the year of the fakeout. However, if you waited for a strong reversal signal, countered trades off big directional moves paid off big. A number of classic "rubber band" long and parabolic short setups presented themselves if you were patient and did not get caught early.