Interested in swing trading stocks–taking trades that last a few days to a few weeks–and wondering how much money you need to get started? How much capital you’ll need is dependent on the strategy you use, which then affects how much you risk per trade and your position size. This article provides various scenarios for how much cash you’ll need to swing trade stocks in a risk-controlled way, which will improve your chance of success.
Markets You Can Swing Trade
Swing trading is taking a position that could last a day to a few weeks (maybe a couple months for some traders/trades). How long a swing trade lasts depends on the strategy you’re using and what you expect from your trades. If a stock typically moves 1% per day, and it needs to move 10% in order to reach your target (where you want to get out with a profit), it could take several weeks or more before the price makes its way to your exit point (if current conditions continue).
Swing traders hold positions overnight, unlike day traders (see How Much Money Do I Need to Become a Day Trader?) who close all positions before the day ends. Strategies vary by swing trader, but the main focus is on momentum–swing traders want to capture a decent chunk of price movement in the shortest amount of time possible. When the price momentum ends, swing traders move on to other opportunities.
This style of trading can be done in most markets (stocks, forex, futures and options, for example) which have movement you can capitalize on (make money!). Swing trading stocks is popular because there’s always a stock moving with momentum somewhere (see How to Screen For Strongest Stocks in Strongest Sectors).
Forex is also popular because usually there’s a currency pair (or several) that is moving well. Futures are also very popular among day and swing traders, offering a wide array of products (such as gold, bonds, stock indices, volatility, coffee, etc) to trade. Swing trading forex requires less capital than stocks and futures, and is therefore a good option if you don’t have enough capital to swing trade stocks.
Let’s look at some scenarios in the stock market, so you can see how much money you’ll need to become a stock market swing trader.
Have a Risk Management Plan
Strategies vary for swing trading, yet one thing successful swing traders do is control risk. In order to determine how much capital you’ll need to trade, first establish how much you’re willing risk on each trade (in terms of deposited capital) as this affects your positions size.
It’s recommended swing traders risk less than 2% of the account capital on single trade. 1% or less is even better. If you deposit $10,000 into an account, that means you can risk $100 (1% of $10,000) or $200 (2% of $10,000) per trade. Choose which it will be and write it down in your trading plan.
The above is your “account risk.” It’s how much of your account you’re willing to risk on each trade. Next, there’s “trade risk.”
Trade risk is set using a stop loss order–it’s an order that gets you out of a losing position at a specific price. Your trade risk and the account risk determine your position size. To see how this all fits together, let’s look an example from the stock market.
- Position size = Account risk ($) / Trade Risk ($)
Assume you’ll only risk 1% of your capital per trade, and have a $10,000 account; 1% of $10,000 is $100 (your “account risk”). If you’ll likely be starting with a different amount of capital, plugin a different account balance that’s more suitable to your situation.
In order keep our account risk to 1% or less, each trade should have a stop loss attached to it. If you buy a stock at a $20, and place a stop loss order at $19.50, your risk on the trade is $0.50 per share (your “trade risk”). Since we can risk $100 (1% of the account) we can calculate how many shares we can take on the trade:
- Position size = $100 / $0.50 = 200 shares.
200 shares is your position size, in this example. Based on account risk and trade risk, this is how many shares you want to take for that specific trade.
Understanding how position sizing works is a key in determining how much capital you’ll need to swing trade stocks. Now that you know about that, we can use it to see how much your balance/deposit should be if you want to swing trade.
For guidance on how to find entry and stop loss levels, browse the General Trading Strategies section.
How Much Money You Need to Become a Stock Swing Trader
There’s no minimum capital requirement to become a stock swing trader. Day trader’s (defined as making more than 4 trades a week that are opened and closed within the same day) are required to maintain a $25,000 balance in their account (in the US), but that’s not a requirement for swing traders. Just make sure you don’t end up day trading a lot, otherwise you’ll be subject to this minimum.
The capital you require is therefore related to your position size, your account risk and your trade risk (as we saw above, these last three factors are linked).
You can also trade on margin. Stock market swing traders can have up to two times leverage, which means if you deposit $10,000 you can purchase up to $20,000 worth of stock. Account risk is always based on deposited capital, not the leverage amount!
Here are some basic guidelines to keep in mind for swing trading stocks.
- All trading is risky. Even with a stop loss on a trade is possible to lose all your capital, or even more capital than you deposited if you are trading on leverage.
- Risk at least $100 per trade, otherwise commissions can be become a huge hurdle to overcome. If you risk $20 per trade, for example, commissions could add significantly to your loss, or seriously erode your profit. On larger amounts, commissions become less of an issue.
- Keep risk to 1% or 2% of the account per trade.
Based on these guidelines we can instantly determine that we need at least $5,000 to $10,000 to even consider swing trading stocks. If we risk 2% of our account per trade (at least $100), then we need at least $5,000 (0.02 x $5,000 = $100). If we want to keep risk lower, and risk only 1% per trade, then we need at least $10,000 (0.01 x $10,000 = $100).
With these balances most stocks can be traded, even expensive ones. For example, assume you have a $5,000 account and see a great trade to buy a stock at $200. You feel comfortable placing your stop loss at $190. This means your trade risk is $10, and you are willing to risk up to $100 on the trade (account risk), which is 2% of $5,000. How many shares can you buy? If you risk $10 per share, you are allowed to buy 10 shares (10 shares x $10 = $100 you are allowed to lose).
10 shares costs you 10 x $200 = $2,000. This is less than the capital you have in the account, so you still have room to take more trades, especially if you have leverage (which is up to 2:1, giving you $10,000 in buying power on your $5,000 account).
Lower priced stocks work the same way. Say we found a trade in a $2 stock and were comfortable placing our stop loss at $1.90. Our trade risk is $0.10, and we are willing to risk $100 (or more…as long as it is less than 1% or 2% of our account balance). Plug it into the position size formula: $100 / $0.10 = 1000 share position size. Once again, this position only costs us $2000 ($2 x 1000 shares) so we have room for other trades in the account.
So we can see that with $5,000, and being willing to risk 2% per trade (or with $10,000 and risking 1% or 2%) we can swing trade effectively. Of course more capital can be utilized in the same way. The same concepts apply to a $100,000 account.
In the examples above the stop loss is 5% away from the entry ($10 risk on $200 stock, or $.10 on $2 stock), this is often adequate for swing trading, but the stop loss distance will obviously be affected by your specific strategy. See Where to Place a Stop Loss for more. How far away the stop loss is will affect the position size.
As a basic rule of thumb, you should start swing trading stocks with at least $5,000 to $10,000. If you fall below these balances, then you may end up risking too much on each trade, assuming we risk at least $100 per trade (less than this, and commissions can become a huge hurdle).
I recommend risking at least $100 per trade because we should only be taking trades where we expect to take more if we win that we will lose if the trade goes sour. For example, if I risk $100, I am typically expecting to make at least $200, $300, or more, on my winning trades. But if I only risked $10, I may only make $20 or $30, and most of that would be eaten up by commissions…not good. So if you want to make decent money, you need to put a decent amount of money on the line. As the account grows, you will be willing to risk more, and thus hopefully make more.
If you expect to make 5% per month (how much you make will vary by strategy) on a $30,000 account, that’s a $1500 per month income, less commissions. If you try to swing trade with $1000 or $2500 (and make 5% per month), most of the $50 to $125 profit will be eaten up by commissions and fees, leaving you with very little, if any, profit.
$5,000 to $10,000 is the minimum recommend swing trading balance, but you can certainly trade with more! Since $5k to $10k is the minimum, it is recommend you start with a larger balance so that a few losses won’t put you below the recommend amount. This is what I recommend for anyone taking my Stock Market Swing Trading Course.
Risk 1% to 2% of your account balance, which means on a $100,000 account you could be risking up to $1,000 to $2,000 per trade (and hopefully make much more to compensate), instead of the $100 risk level with the minimum account balance.
Problem of Under-Capitalization When Swing Trading Stocks
Having more capital in your account is better than less. One big mistake traders make is being under-capitalized. In the stock, market being under-capitalized can easily happen…especially to new traders if their account drops in value.
As indicated, to make it worth our while we should be risking at least $100 per trade. This way our winners won’t be significantly eroded by commissions and fees. But if we risk $100, what happens if a trader’s account balance drops to $4,000? Now they are risking 2.5% on each trade. If things still don’t go well, and the balance drops to $3,000, the trader is now risking 3.3% per trade…they are risking more as their performance gets worse!
If your account balance drops below $5,000, STOP TRADING, because you can no longer afford to lose $100 and still keep the account risk to less than 2%. Similarly, if you opened an account with $15,000 and you said you would only risk 1% trade, if your balance falls below $10,000, stop trading. If you keep trading with a balance below $10,000 you will be risking more than 1% (risking at least $100 per trade).
Top up your account to bring it back above $5,000 (or $10,000 if risking 1%) if you are still confident in your strategy (or are willing to put in the time to make it work), or simply opt not to trade until you are in a better position to do so.
Money Needed to Swing Trade Stocks – Final Word
The quickest way to see how much capital you need is to use the followed formula:
trade risk x position size x (100%/account risk %) = Capital Required.
Assume you risk 1% of your account, buy 100 shares and your trade risk is $2 (buy at $38 and stop loss at $36). Plugin the numbers:
$2 x 100 x 100 = $20,000. That’s how much you need to make that trade. You could utilize leverage (up to 2:1) which means that you actually need $10K in the account to make this trade, because with leverage you will have the required $20K. Of course you will want to have a bit more in the account than the exact amount you need!
If you’re willing to risk 2% of your account per trade:
$2 x 100 x 50 = $10,000 capital required.
Account risk and trade risk help you determine how much capital you will need. Each trade is slightly different, with different trade risks and position sizes. Account for that when determining how much you will deposit. Study the stock charts, decide how and where you will enter and where you will place a stop loss.
As a general rule you will need at least $5,000 to $10,000 to swing trade stocks effectively. It is recommended you deposit more than the minimum, because if you deposit the bare minimum a few losing trades will put you below the recommend account balance.
It’s better to wait a few months and save up more capital than to rush in under-capitalized and likely lose it all. Use the time to practice while you save up!
By Cory Mitchell, CMT