Swing Trading Strategy Example
Here is a successful trading strategy. There are many others.
It can be used to model your own strategy.
1-2-3 (long only)
I. General Considerations
Overall market and individual stocks – non-trending:
The environment that is most conducive for swing trading is when the overall market and individual stocks are going nowhere, rising and falling to repeat again and again, with no discernible trend.
Overall market – trending:
Be cognizant of the overall direction of the market. For example, where does S&P500 (SPX or INX) stand in relation to MA(50), MA(150), and MA(200) and their crossovers? Going long best when SPX is trending upward.
Individual stocks – trending:
Be cognizant of the trend on the weekly (and not just the daily) chart and trade the daily chart accordingly. Going long best when the stock is trending upward. Here a long position is taken just after a correction has ended (volume should be decreasing) and the upward trend resumes (with increased volume at breakout). Going long also possible when the stock is trending downward. Here a long position is taken as soon as a rally presents itself (even better: at the beginning of a trend reversal upward).
II. Entry Conditions
Stage 1: Prices break trend line
- Prices must be declining so the downward trend line is ≥ 1 mth (21 candles) in length measured from peak to trend line price cross; few price gaps
- ideally, MA(10) and MA(30) should form a clear channel without crossing each other below the trend line (other than the initial downward cross at the beginning of the trend)
- MA(30) may be above the trend line, but not MA(10) significantly so as well
- in other words, initial upward cross occurs above the trend line, after prices cross trend line, with which entry point should coincide, ideally just before up cross, in or near the zone where MA(10) is below MA(30), or at up cross, or within a few days after up cross where MA(10) above MA(30); do not trade if up cross 1 day or more below trend line
- Prices must cross above the downward trend line
Stage 2: Prices make a higher high
- Prices must make a higher high or a series of higher highs
Stage 3: Prices retest lowest low
- Prices must retest the lowest low of the downward trend and/or prices must form a swing point low above the lowest low. The lows of the five candles of a swing point low are low(1), lower(2), lowest(3), higher(4), higher still(5).
- Go long near the end of the day (at 3:30)* of the fourth candle of the swing point low, provided that:
- swing point low (or previous) prices have retraced less than 50% of the downward trend; do not trade especially if entry price greater than 50% retracement price
- second candle of the swing point low is not the candle which first crossed the trend line
- second or third candle of swing point low must close above the trend line
- end of day prices of fourth candle of swing point low are above opening price and above trend line; if equal or slightly lower, enter next day (at 10:30) if first hour prices higher than previous close
- fourth candle is before, at or not more than 7 days after up cross; do not trade if fourth candle before, at or after down cross
- fourth candle looks to close above EMA(8); thus, only trade if entry point above EMA(8); do not trade if entry point below EMA(8)
- risk/reward ratio is > 2.00 based on stop-loss calculation and upward profit potential: set initial stop-loss at 0.5ATR, to be replaced with 1.6ATR stop once position becomes profitable; see next section for details
*End of day criteria may be relaxed if there is a strong opening and/or strength maintains throughout the day; if so, entry may occur earlier in the day.
Note: these conditions permit taking a position early, before the fifth candle of swing point low is formed; also before prices go above the previous minor high
III. Order Entry Procedure, Position Maintenance, and Exit Conditions
First enter a buy order, then right after enter a sell order using a stop. The buy order will automatically set to Day. Set sell order to GTC. The buy order should be immediately executed and filled. The sell order will pend open.
- Since it is more important to get in at 3:30 than to get the best price, a market buy order is sufficient, guaranteed to be filled.
- Right after the buy order, the sell order (the initial stop) will be set at 0.5ATR.
- If the position is not subsequently profitable, the initial stop will be replaced with a stop set just below that day's low if the close is below the purchase price.
- If the position becomes profitable, the initial stop will be changed to a 1.6ATR stop, using the most current EOD ATR data, as soon as this stop is greater than the initial or replaced stop. Barring this, the initial 0.5ATR stop will be continually re-adjusted based on most current EOD ATR data.
- If prices continue to rise to new highs, stops will be re-adjusted to reflect most current EOD ATR data. (If prices continue to rise, the stop may be tightened and/or positions partially sold to lock in profits).
- If active monitoring and manually moving stops on open positions is not possible, an automated trailing stop sell order may be entered instead.
- In all cases, once a position a taken, daily closes must remain above EMA(8):
- if a day's close is below EMA(8), remain in the position. But if next day looks to close below EMA(8) as well, exit the trade with a sell order after first canceling the existing stop (the position is likely to stop out before this, but this criteria is to remain in play for all positions taken).
- Regardless of the above exit criteria, an immediate exit may be taken if market conditions warrant.
Note: actively monitoring and moving stops on open positions is preferable to TradeKing's procedure for trailing stops (i.e., since their quote data comparison cycle is 30 seconds, they may fail to perfectly catch new highs) and since trailing stops ideally need to be re-adjusted to reflect most current EOD ATR data anyway. Thus a 'manual trailing stop' is best, where sell stop orders are continually changed to reflect new highs using most current EOD ATR data. The use of trailing stops will be reserved for when open positions cannot be actively monitored. [UPDATE: TradeKing is now Ally.com]
Note: trailing stops can be set using % or price points. Since TradeKing only allows whole number %, using price points will be more accurate than rounding to the nearest whole number %.
Note: no buying and selling within the first trading hour except for stop replacement (e.g., if opening prices are higher than current trailing stop high point, replace with new trailing stop)
ATR = average true range
EMA = exponential moving average
EOD = end-of-day
GTC = Good 'Til Canceled
MA = moving average
up cross = when MA(10) crosses above MA(30)
down cross = when MA(10) crosses below MA(30)