The monthly S&P500 Emini futures candlestick chart has not had a pullback in 14 months. This has...
The Case for Classic Swing Trading
11/27/2013 6:00 am EST
Trading is not only about indicators, but about having a consistent day-to-day process, notes the staff at LBRGroup.com.
Swing trading is a pure, 100% technical approach to the markets. It is based off analyzing the individual movements that comprise the bigger picture trends. The goal is to become a master at interpreting the individual "swings" and the patterns they form. This is the purest form of market analysis we know of, with roots going back over 100 years to the early market forefathers such as Charles Dow and Richard Wyckoff.
Swing trading relies on monitoring the length and duration of each swing. Each swing defines important support and resistance levels, or prices where the market can be expected to find increasing supply or demand. We also measure the momentum of each swing, to determine whether momentum is increasing or decreasing.
We ask ourselves: how do these various swings, with differing lengths, durations, and momentum, fit into the structure of the bigger picture, higher-time-frame trend? And is there sufficient volatility to justify trading specific swings? Volatility is an area that we have done considerable research on, and which we incorporate into the classic understanding of swing trading in our own unique way. Putting these pieces together and sorting out the implications is the swing trader's job.
It is important to emphasize that the swing trader judges the market solely by its own actions. Monitoring the magnitude, duration, and quality of the swings tells us when to trade for a small target or a larger objective, and which swings to follow and which ones to ignore. A professional learns how to work the swings in the direction that achieves the highest level of trading efficiency. In most cases this will be in the direction of the longer-term trend.
Trends are defined by specific patterns and are comprised of many individual swings. The individual swings define our risk points. These are all quantifiable elements. A trader who claims to be proficient in swing trading should be able to quantify both the trade setups as well as the probabilities for the outcome of each trade.
Swing trading is no different than playing bridge, poker, or other card games based on statistical probabilities. It comes down to a basic understanding of game theory and the numbers surrounding each point of play. As in all games, swing trading reveals to us that money management and risk control determine the outcome of the game more than any other variable.
Basic Tenets of Swing Trading
During strong trends, we use retracement swings to enter in the direction of the trend. These points are also referred to as "pullbacks" or "dips" in an existing trend. When a new momentum high is made, we look to our highest probability trade, which is to buy the first pullback. When a new momentum low is made, we look to sell the first rally. We continue trading in the direction of the main trend until there is a buying or selling climax, or a failure test. A failure test would be the most aggressive type of trade entry when swing trading. A retracement in a trend would be the most conservative. Pattern recognition is used to determine the trend and also to define a "failure test." Experienced swing traders always look to trade in the direction of the higher-time-frame trend, while using the lower time frame patterns to determine risk and entry.
George Douglas Taylor probably best summed up these basic tenets in his classic text on the subject, known as the Taylor Book Method, dating back to the late 1940s. In his manual, Taylor lays down a very organized method for determining the short-term trend, and the position of the short-term cycle within the trend. Tests of previous highs and lows, as well as systematic counting of cycle days, forms the basis for determining whether to buy, sell, or sell short.
In sum, swing trading is quantifiable, hard-core technical analysis. It is important to develop a systematic approach that will remain durable and robust. Trading is not only about indicators, but about having a consistent day-to-day process. Use the technicals developed by the patterns in the swings as the foundation to your process.
By the Staff at LBRGroup.com
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