An Overview of
Swing Trading Strategies
Professional traders usually recommend using a simple swing
trading strategy. This is sound advice. A simple set of
instructions is, after all, easier to follow than a complicated
set. This becomes especially important when you find yourself
needing to make split-second decisions. In the chaotic world that
is the financial markets, you tend to cling fast to anything that
provides a clear course of action.
The simplest swing strategies, however, are often the most
ambiguous. Consider the following directive:
"Go long at the first swing-point low after a prolonged
How exactly would you go about implementing this strategy? If you
are entirely new to trading, you might initially be hung up on
what 'going long' means, or what swing-point lows and downtrends
are. No problem. These are easily cleared up by studying trader
Or are they? Do some research and you will discover how there is
no consensus over the definition of a downtrend, let alone what
constitutes a prolonged one. Would that be measured in days, weeks
or months? There is also disagreement over swing-points. Some
traders say four candlesticks are needed to form one. Many insist
on five. Others get by with only three. So if we are told to buy
once a swing-point low appears post-downtrend, the question of
exactly when remains vague at best. In trading, such uncertainty
cannot be tolerated.
Presumably the author of this strategy knows these details but has
left them unsaid. Perhaps he did so for the sake of brevity. Or
maybe he thought, 'Aw, that's so simple I needn't write it down.
Everybody knows that!' Well, not everyone does. In a way, though,
it matters little. It works for him and that is enough.
This is where you want to be as a swing trader. Since your own
money is at stake, you should author your strategy in a way that
works for you, not others. There is no need to use fancy trading
terms. You may later wish to share it with the world and pretty it
up. But, at least initially, you should try to address all
questions that are liable to arise using your own words. Give
yourself detailed instructions to deal with every possible
contingency. As you later mature as a trader, you may look back
and be embarrassed at how elementary your understanding once was.
You might then opt to condense your strategy into fewer words. You
might even manage to distill it down to just a dozen or so. And
that would be a great place to be.
Think Like a Computer
Most people know that casinos do not make money year after year
because they are perpetually lucky. It is because they have
stacked the odds in their favor.
If you bet a dollar on
red at the roulette table, you may win (or lose) a dollar. But
while the payout is even-money, the odds of doing so are not. They
are slightly less than 50-50 against you. It is because of this
house edge that casinos are consistently profitable. It makes it a
statistical certainty they win in the long run.
To succeed as a swing trader, you must become the house. Your goal
is to develop a trading strategy that puts the odds of making
winning trades in your favor. This is how the professionals do it.
And you can do this entirely yourself. Get your hands on
historical market data and begin looking for patterns that seem to
anticipate which direction prices will head in the future. It need
not be anywhere near a perfect forecast. It just needs to be
better than 50-50.
Ideally, you will want something much
better than 50-50. This, of course, is easier said than
done. You can spend a lifetime looking for the (non-existent) holy
grail of trading. And many traders set out to do just that. But if
you are just starting out, the best advice is to not try
reinventing the wheel. Look to see what others before you have
discovered. Read and study books written by past master-traders.
Scour the web for reputable sites. Then take the best elements you
find and begin piecing together your own swing strategy. One that
not only works, but one that is meaningful to you. This point is
crucial. You must believe in it.
Because putting the odds in your favor is only the first step to
developing a winning swing trading strategy. The equally important
second step is to craft it in such a way that you can faithfully
execute it without forethought. You must take the guess work out
of trading as much as you can. For that is where emotions
two big ones: fear and greed) creep in and threaten all your hard
work. Emotionless trading is your ideal. Think Data from Star
. Write up your trading strategy so it proceeds
in a logical, step-like fashion. Almost as if you were encoding it
for a computer.
. Unless you wish
to turn your trading over completely to an automated trading
system, you will want to retain some discretionary decision-making
power. But there is no need to intentionally program obscurities
into your trading strategy. Discretion is present in the best laid
plans since no human system can anticipate every contingency 100%
of the time. Perhaps the better model here is Spock from the
original series. He was a flawed half-human being after all.
Elements of a Swing
Although you will continually update and refine your swing trading
strategy as you gain real-world trading experience, it is critical
for this document to be as complete as possible before you
actually begin trading. For it tells you exactly
what to trade, when to trade, and how to trade. Pulling
up your broker's order window when you have not yet worked out
answers to these questions is simply a fool's errand.
Like a trading plan, the structure of your trading strategy
document is entirely up to you. It just needs to address the what,
the when and the how of trading. Here is one way to organize the
Considerations – you might begin with stating under
what general market conditions your strategy will optimally
perform. If your strategy calls for shorting stocks, for
instance, you probably want to be in an overall bear market to
increase the likelihood that your trades will profit. Or if
you wish to repeatedly trade a select handful of stocks, you
probably care less for what the overall market is doing and
more for stocks that are non-trending in order to take
advantage of their periodic swings from highs to lows and back
Conditions – here is where you define your set-ups,
the circumstances under which you enter trades. What behavior
must a stock exhibit to be considered
tradable? Must its price be, for instance, climbing for five
consecutive days while its key moving averages are still
sloping downward? Or will you wait until those moving averages
also turn up before you buy that stock? You can state your
criteria quantitatively using hard numbers, or qualitatively
by giving visual descriptions of stock charts, or
anything in between. As long as you state explicitly what
needs to happen before you trade, anything goes. What is most
important is that it makes sense to you so you will not
hesitate in executing it.
Maintenance – does your strategy call for actively
monitoring open positions? Doing so has benefits. You are
likely to conquer the steep learning curve of trading that
much quicker if you can study the intra-day movements of your
positions in real-time. But this may not be possible if you
have a full-time job. If so, you will need to figure out what
instructions to give your broker so your positions are
attended to in your absence.
Conditions – this element of a trading strategy is
often neglected by new traders. Even experienced swing traders
tend to focus their research on entries rather than exits.
This is unfortunate because deciding when to exit a trade is
arguably more important. For exits are where profits are
ultimately realized, whether that comes indirectly through
cutting loses short or by directly locking in gains. Since
stock prices fluctuate throughout the day even when they are
generally on the rise, it is critical to get your exits just
right. Or else you will miss out on profits – the very reason
you enter trades in the first place. You can decide where to
make your exits in any number of ways. Many consult charts for
price support and resistance levels. Others rely on indicators
to tell them its time to get out. But one thing is clear. Once
you optimize your exit criteria through testing and make it an
integral part of your trading strategy, you must consistently
apply it to all your trades. Otherwise subjective elements
will rule your trading. And in the financial markets, that is
tantamount to rolling the dice.