Getting StartedSwing & Position Trading

Simple Swing Trading

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.

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:

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?.

Defining retracement   

Simple swing trading relies on the method used by W.D. Gann.who identified potential swing lows by requiring a minimum of three consecutive bars of lower highs and lower lows, with the final bar in the series making the potential swing low bar. The potential swing low bar gains initial confirmation when the price moves and remains above the high of that swing low bar and final confirmation when the price rises to a new high for the trend.

I have zoomed in on the third retracement from the first chart since it is a classic Gann 3-bar retracement . Others, such as Marc Rivalland, modify Gann?s requirement by stipulating that these bars do not need to occur consecutively. In either case the retracement can run to more than three bars of lower high and lower lows, although many traders will place some limit. A popular rule is  that the number of bars in the retracement should not exceed the number of bars in the previous up leg, although many will have abandoned any thought of a trade well before then. 

Still others combine the use of Fibonnacci retracement levels with these methods to identify where substantive swing lows are likely to occur.

Once again, it is up to each trader to determine the precise definition to be used.

When to enter?

Aggressive traders will enter as soon as the price exceeds the potential swing low bar high. The more cautious may wait to see a close above that high and enter at the best price available in the next session. And the even more cautious may await the final confirmation of the swing low as the price makes a new high for the trend.

It is logical to place a stoploss just below that same bar?s low in case it turns out not to be a true swing low bar. The effect of this is that more aggressive traders have the least money at risk, although they are likely to suffer a greater incidence of false signals and consequent triggering of their stop loss.

When to exit?

It is often the case with a mechanical method that exits prove more problematic than entries. Simple swing trading is no exception. The basic principle is to stay with the trade and exit on a breach of the most recent swing low. Such an approach would have worked well in this XTA example where most of the trend would have been captured and if all trends were so well-behaved there would be little problem. It won?t surprise you that most are not.

The main problem is the same as I mentioned in the section about trend definition and comes when the price has moved far away from the most recent swing low. It is clearly absurd to watch healthy gains waste away – possibly into loss if the most recent swing low had triggered your opening trade – waiting for this breach. Alternative exit methods must be developed to guard against this danger when such circumstances arise.

Conclusion
 
I have sought to discuss the basics of a simple swing trading method and this article is not intended as anything other than a sketchy outline. I have touched on a number of questions and others will have occurred to you if you are interested in such a method. It is for each to answer those questions for themselves as they develop (and test) their set-up and trading plan. I hope, at least, that I have given you food for thought.

Purely an amateur and part-time trader Jon has played the market for over thirty years and more actively since he retired five years ago. He uses the swing technique he describes in his article to keep it simple because he knows he does not have the skill and expertise to challenge professional traders on their own ground. Jon has been a member of T2W since May 2003.

Purely an amateur and part-time trader Jon has played the market for over thirty years and more actively since he retired five years ago. He uses the ...

timsk

Legendary member
7,057 1,861
Jon,
"I hope, at least, that I have given you food for thought". You have indeed - in a very clear and well written article, thank you.
 

tomorton

Legendary member
7,314 979
Well done Barjon - clearly and concisely explained. I would only add that if I followed this simple method more carefully I would do better: as it is, using (abusing?) this method gives me a 60-65% success rate on the FTSE100 index but the real plus point is the very limited drawdown before your stop is hit.

Have to recommend everyone at least tries this approach.
 

Quercus

Well-known member
399 7
A great simple approach Barjon, good effort in posting the article!
 

bracke

Experienced member
1,286 12
barjon (alias The Trading Silhouette)

A straight forward and easily understood article which provides a good basis for the technique and whets the appetite for further knowledge.

Just one carp - You knew there would be one didn't you! The inclusion of volume on the charts might have been of interest.

Many thanks for your efforts.

Regards

bracke
 

charliechan

Experienced member
1,008 119
fundamental information and general market conditions could (should?) also be used to determine if a long term trend following method such as this is to be used. (i hope lion will be pleased to hear me say that :) )

market condition is the start of all trading decisions.

nice job.
 

bracke

Experienced member
1,286 12
Come on barjon, as a TA exponent you're not going to let charliechan get away with that are you?

Regards

bracke
 

barjon

Legendary member
10,311 1,566
bracke said:
Come on barjon, as a TA exponent you're not going to let charliechan get away with that are you?

Regards

bracke
oh, alright brackey boy,

charlie chan is spot on about market conditions - it's dangerous to trade individual shares against the market trend, but it can be lucrative sometimes. Whether one has a rule only to trade with the market, or with smaller positions (my choice), or whatever is up to each trader.

As far as fundamentals are concerned - it's probably safer if you're thinking fairly long timescales to have the support of good numbers behind you.

Merry Christmas

jon
 

timsk

Legendary member
7,057 1,861
barjon said:
- it's probably safer if you're thinking fairly long timescales to have the support of good numbers behind you.
The value of Funny Mentals . . .
tomorton (above) and I have a mutual friend who we both admire greatly for his brilliant and piercing fundamental analysis skills. Said friend has been investing for 50 years now and, over that period, he has made a great deal of money. His percentage returns throughout the 1990's - up to the .com crash of 2000 - exceeded those of Mr. Buffett. Since then, market conditions have been less favourable for LTBH investors like our friend. He gets frustrated when the performance of his stock(s) does not complement the fundamental picture. Quite the opposite on occasions; price tumbles faster than a lead balloon. This perplexes him and leaves him wanting answers. However, the notion that these may be found within price charts is one that he resists strongly.

Witnessing all this from the sidelines leads me to conclude that fundamentals are great for a bull market and/or as a preliminary filter. If I ever metamorphose into a LTBH investor, I can't imagine ever doing so without including the study of stock, sector and index charts to make my entry and exit decisions. As I've mentioned elsewhere, this approach of combining the two disciplines is the one adopted by U.S. trader Dan Zanger who famously turned $11,000 into $42 million in less than 2 years. The fundamental filter that he used (and still does, I believe) is William O'Neal's CANSLIM formula with some minor adjustments. Thereafter, enty and exits etc. are governed exclusively by simple pattern set ups, support, resistance, price and volume.
Tim.
 

darktone

Veteren member
3,916 1,000
Excellent!

Biggest obstacle i found in trading this way was leave things alone when they should be left alone! :)


Come on barjon, as a TA exponent you're not going to let charliechan get away with that are you?
What about sentiment!?.......................(BOOOOO... HISSSSSSS!) lol
 

tomorton

Legendary member
7,314 979
Hi profitman -

That's not a silly question. many people suggest swing trading indices - they may be more predictable using TA and consituent member's charts for cross-checking, they don't have catastrophic profit warnings and aren't affected by profit warnings from other companies, as can happen with equities. They are probably less volatile and gap less than an individual share.

Swing charts are most helpful when there is a daily range, with a high and low. That is, a real high and low generated by actual trading, not a high and low set by a market maker or due to unrepresentative volumes. This means you need to look for an instrument with good volume every day - indices fit this, but also large cap shares. If you see a share price chart with flat prices, highs and lows day after day, it might be a good share but its not for swing trading.

After that, if you can go short as well as long, possibly it does not matter too much which index you go for, though some are more volatile than others, which can make tracking your positions more strenuous and your risk greater.

Good luck
 

Similar threads