When looking at the stock market, it's easy to just focus on the return side of the equation. But swing trading is not a get-rich-quick scheme. The easiest path to wealth creation is to take advantage of compounded results over time.
That means not digging a hole so deep with a drawdown that you lose time getting back to even. If you aren't looking at the negative side of the equation — the risk of losses — you are missing a huge component. Here's one of the ways we evaluate risk on SwingTrader with an off-high chart.
Focus On The Negative?
When evaluating returns, you like to see those charts that go up and to the right. Steep angles mean you're making faster progress. One of the ways we keep risk front of mind is by charting our percent off highs. Here flat is good.
In the chart shown, we took the percent off high year-to-date of IBD's SwingTrader product compared with the S&P 500 and the Nasdaq composite. We've also charted our invested percentage at the bottom.
At the start of the year, performance was at zero and so was the drawdown. As you make progress to highs, the performance chart goes up and the off-high chart will flat line (1). That's good from a risk standpoint. It means you aren't losing money off the top.
Of course, eventually pullbacks happen and they often lead to drops in the percent invested (2). A combination of taking profits into strength and cutting losses quickly reduces exposure. If you can't find setups to replace the sells, that exposure can stay low for long periods of time.
But if the market rights itself and setups appear, exposure will increase. Ideally exposure increases and pushes your equity to new highs (3). The off-high value going back to 0% means you're making new highs.
How Our Swing Trading Adjusted In February
With market indexes mostly rangebound the first couple months of the year, we kept adjusting exposure to try and stay on the right side of the market. We would decrease quickly to reduce our drawdown (4) then ramp up quickly to make progress and get back to highs. By Feb. 18, we were at highs for the year with a 9.7% gain vs. the S&P 500 showing a 4.2% gain (5). We were on margin but started getting pushed out of stocks with profit taking and loss cutting, even though the S&P 500 was making closing highs the next day.
On Feb. 21 three days after our highs we went to all cash (6). The difference this time was that enough damage was done to stocks that the swing trading setups disappeared and we didn't ramp up exposure in a meaningful way for any length of time. There was a brief venture getting up to 86% invested on March 25, but it didn't last more than a day (7). The Nasdaq composite had a 24% drawdown (on a closing basis) and an extra 3% down if using the ultimate low (8). Meanwhile, SwingTrader never came down more than 5% off its high for the year.
Time To Ramp Up Exposure?
Staying positive for the year amid a bear market turn is a huge win. But the gap of outperformance can quickly diminish on a sharp rally. The huge cushion lets us be patient but not complacent.
This week we started ramping up exposure and are back over 40% invested (9) for the first time in a month. Swing trading setups haven't exactly been plentiful and it's still a very headline sensitive market, adding potential volatility. But we saw a follow-through day this week. As a result, we've gotten our exposure in a more cautious way with market and sector ETFs that have lower daily average moves.
We're letting the market be our guide rather than our opinion on how the news might play out. Most importantly, our eye on drawdowns and risk led to protection for subscribers. Not just their portfolios but also the mental capital that comes from digging a shallow hole that isn't difficult to climb out of.
More details on past trades are accessible to subscribers and trialists to SwingTrader. Free trials are available. Follow Nielsen on X, formerly known as Twitter, at @IBD_JNielsen.
