Swing Trading: Rules and Philosophy


145 ratings



Linda Bradford Raschke

30 Jun, 2005

in Technical Analysis and 1 more

My personal trading style is based on a method described in the 1950’s by a veteran floor trader named George Douglass Taylor.  The “Taylor Trading Technique” is a short-term method for trading daily price movements that relies entirely on odds and percentages. It is a method as opposed to a system. Very few people can blindly follow a system, though many find it easier to be discretionary in a systematic way.

Because this short-term swing technique generates frequent trades, it is important to know the correct plays, when to lock in profits, and when to seek the true trend. Taking a loss is merely playing for better position. One trades strictly for probable future results, not for what the market might do.

To know the correct play is to know whether to buy or sell first, to exit or hold. Trades are based on objective points, which are simply the previous day's highs and lows. Movement between these two points determines the true trend.

When swing trading, adjust your expectations. The more conservative your expectations, the happier you will be and, ironically, the more money you will probably make. Entries are actually the easy part of the method.  What is more difficult is having the confidence in your ability to get out of bad situations and bad trades early, and knowing when to use tighter stops for trading swings and wider stops when trading trends.

The Taylor method teaches you to anticipate. Never react! Know what you are going to do before the market opens. Always have a plan, but be flexible. See your stop (support or resistance) before initiating a trade. Again, knowing how to trade out of trouble situations and how to get off the hook with the smallest possible loss is part of the skill.

Never trade in narrow, dead markets; the swings are too small. And never chase a market. Rather than worry that you've missed a move, consider yourself fortunate that oscillations and volatility have come back into the market.

Basic Rules for Swing Traders

Because of the short-term nature of this technique, swing traders must adhere to some very basic rules, including:

  • If the trade moves in your favor, carry it home overnight.  The odds favor follow-through. Expect to exit the next day near the objective point (explained later). An overnight gap presents an excellent opportunity to take profits.  The exception is when the market offers you windfall profits; take these to the bank on the close.  Do not get cute.
  • Concentrating on only one entry or one exit per day relieves some of the mental pressure.
  • If your entry is correct, the market should move in your favor almost immediately. It may come back to test your entry point a little, but that's OK.
  • Do not carry a losing position overnight. Exit and play for better position the next day.
  • A strong close usually indicates a strong opening the following day.
  • If the market doesn't perform as expected, exit on the first reaction.
  • If you are long and the market closes flat, indicating a lower opening the following day, scratch or exit the trade. Play for better position the next day. It is always OK to scratch a trade!
  • Use tight stops when swing trading and wider stops when trading trends.
  • The goal always is to minimize risk and create “freebies,” i.e, trades that move in your favor quickly, where the stop can be moved to break even.
  • Training yourself how to think and act under pressure is a major part of the battle. Therefore, when in doubt, get out! You have lost your road map and your game plan. It’s an old cliché, but when dealing with real money, it’s one cliché you want to respect.
  • Place your orders at the market.  Do not get cute trying to price your trades with limit orders.
  • When a trade isn't working, exit on the first reaction.
  • Always anticipate.  Do not get caught up in reacting to market moves.

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The few times I've been fortunate enough to hear Ms. LBR or read her writings (New Market Wizards interview was great), I've been stunned. Refreshingly open, honest, helpful, direct, clear.... I could go on. Thank you for the great article!

Sep 17, 2009

Member (1 post)

Far above excellent is this article. Many pointed and sharp
arrows are given for the trader's use and defense against
uncertainty in making a very accurate and profitable strategy
for success.

Sep 15, 2009

Member (5 posts)

I find this style of writing so uplifting "Reserve compassion for yourself and your limitations." And so full of useful info too! Thanks Linda

Aug 28, 2008

Member (3 posts)