T2W Trading Community

Take a look at the nice up-trend on the chart below. There are plenty of reasons to have entered around £10 and sat comfortably in your armchair until some warning signs and an exit around £14, or even higher. A 40% rise and an easy 400 or so points - easy in hindsight that is. We can’t trade hindsight, of course, but a simple swing trading technique would have served you well in real time.

(click to enlarge)

Good trends like this develop by taking a run forward followed by a few paces back (retracement) followed by another run forward and a few paces back and so on. Simple swing trading seeks to take advantage of trend continuations by identifying those significant retracements in order to provide points of entry and a level of exit for ongoing trades. The low point of each retracement constitutes a swing low - the blue horizontal lines - and you can see that entry after each of these (except the last, maybe) would have brought good rewards.

So, is it as simple as it looks? Of course not.  For a start, there are important questions of definition in relation to trend and retracement, as well as entry and exit criteria, that need to be answered and established.   I will go on to discuss these, but it is important to realise that each trader must arrive at their own conclusions for themselves in a way that is consistent with their trading instrument(s), time frame, style, attitude to risk etc.

Defining trend

There is no problem in seeing the up-trend in the first chart. It is really easy in hindsight, but what if all you have is this:

(click to enlarge)

An up-trend starting or what? No answers here.  Each will have their own determination of what constitutes a trend change, whether it be judged on the price action alone or moving averages or a favoured indicator or some combination of those. If XTA had been in a down-trend some swing traders would be looking for a break through the last swing high of that down-trend to signal a potential trend change.

At this stage what happens at the first significant reaction will be informative and if it turns out to be the first retracement of a new up-trend with the price then moving to new highs, then simple swing trading assumes an up-trend to remain in force until such time as the most recent swing low is breached - which happened in this case at around the £14 level as you can see in the first chart. You will spot that there are difficulties in this simple approach when  the swing low is nearby - is it a potential trend change or a false swing low? - or when it is far away, so some element of judgement, or alternative methodology, must be introduced.  .

But what constitutes a significant retracement leading to a swing low?.