Swing Trading Method for Consistency

10/31/2014 6:00 am EST

Focus: STRATEGIES

Steve Wheeler, of NavTrader.com, explains the ins and outs of swing trading and how to build confidence in trading through risk management, preparation, and trading consistency.

Swing trading implies that you are going to identify the major moves that the market makes in the time frame in which you trade and take advantage of a portion of the major moves that are made. Market behavior tends to repeat itself over and over, so knowing these patterns can help to put the probabilities in your favor.

In terms of price behavior, a repeatable pattern is that price tends to cycle between range contraction and range expansion. After a period of market consolidation, you can expect range expansion to occur. When this range expansion occurs, you can take advantage of predictable moves that the market will make in the direction of range expansion. After entering these trades, there are logical strategies that you can employ to determine protective stop and exit target levels.

I will show you examples of price chart behavior and indicators that can best predict low risk/high reward examples.

Making money in the market is a matter of being on the right side of the market. Specific to the futures markets, there are both up and down moves each day that provide many trading opportunities. One approach to the markets is to look for evidence of major support and resistance levels based on chart history. Many people ask me which time frame that I look at for my trading. My best answer is that I look at all of them. A good analogy would be that if you were going to buy or short a stock, you would most likely start by looking at a weekly or daily chart. Why would you approach the futures markets any differently? To put the odds in your favor, you must find things that occur over and over and trade with this information.

How to Determine the Best Market with Respect to the Risk to Reward Ratio

To determine the best markets to trade for favorable reward to risk ratios, you can scan your charts or automate the process by using a scanner.

I have listed a number of trading instruments on the scanner. The trading instruments with the lowest values will identify the trading instruments with the most favorable reward to risk ratios.

Probabilities favor the continuation of a trend. This is why you want to trade or invest in the direction of the major trend. For purposes of intraday trading or even investing, a daily chart is a very good place to start to analyze the major trend. To put the odds even further in your favor, I recommend that you analyze whatever you want to trade to find out the consistency of the trend. This can be done by measuring the trend in various time frames all the way from short-term trends such as a five-minute chart all the way to daily or even weekly charts.

How to Build Confidence in Your Own Trading

Preparation for trading success consists of market observation over a period of time so that the trader can build confidence in knowing what usually happens in the market. You will have greater confidence in your trading when you learn how to succeed from the recurring market behavior that repeats itself every day. To take advantage of cycles in the markets, observe the typical move that a market moves after it moves up or down out of a range contraction pattern.

The following are observations of market behavior that will help to put the probabilities in your favor.

The real objective is to build knowledge of probabilities of market behavior so as to take consistent success out of specific trading instruments.

One way to determine if you have this type of pattern developing is to look at the current range relative to past range.

You can take advantage of this pattern of low volatility that will predict an upcoming period of higher volatility. If the market breaks down from a period of low volatility, you will likely have a downtrending market. Downtrends consist of lower highs and lower lows. Uptrending markets consist of higher highs and higher lows. Markets move in a wave formation, and when each wave is formed, a pivot is formed. These pivots form lower highs and lower lows in a down trend, and higher highs and higher lows in an uptrend.

NEXT PAGE: Successful Projections and Risk Management

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Swing Trading Method:

Success Projections

Entries into the trade can be below the lows or above the highs of short range consolidation bars. The bars with the gold frames around the price are consolidation bars using the Trendicators™ charts.

Determining success objectives for a trade exit is done by reviewing past chart history and finding recent support and resistance areas. When price expands to the downside, a short trade can be entered, with stops just above recent resistance levels and success projections near the recent support levels.

Risk Management

A primary downfall of beginning traders (as well as some seasoned traders) lies in not knowing how to manage risk or by not obeying prudent risk management techniques. The use of protective stop losses (known as stops); is one important tools in trading futures. An even more important tool is known as position sizing. Position sizing answers the question of how many contracts I should trade in the futures markets as well as how many shares should I should buy or short in the stock market.

We know that trading is all about how to react to your successes as well as trades that don’t go your way. No discussion of trading would be complete without a discussion of risk management. For futures trading, risk management is established with a combination of the use of stop orders combined with position sizing. You need to pair a proven strategy along with risk management. Risk management is accomplished, in general, by never taking a big loss on any one trade. I suggest that you start by making sure that on any one trade that you do not risk any more than 1% of your trading account. You will need to calculate before you enter a trade whether you would be risking more than 1% of your trading account.

To calculate position size you need to know some basic information such as the following:

  • Account Size
  • Risk Percentage that you are assuming
  • Tick value of contract you are trading
  • Number of ticks of your initial stop loss order

A Risk Management calculation example for the e-mini would be as follows:

  • Entry price = 1438.25
  • Initial Stop level = 1436.25 = 8 ticks on the S & P E-mini
  • 8 ticks x tick value of $12.50 = $100 $100 x 1 contract = $100 risk on this trade.
  • Account Size = $10,000

In this example, you would be able to trade 1 contract $10,000 x 1% = $100 maximum risk

Like any profession, you need to be prepared to take on the markets in a structured and methodical manner. If you study the above principles, you will better understand overall market behavior and you will be equipped to begin to consistently benefit from the great opportunities that exist each day in the markets.

Platform:

As you develop your trading skills, I suggest that you use a professional trading platform that will allow you to trade directly from the charts. The trading platform should also allow you to trade in simulation mode as well as to execute trades in your live futures account. It is important to develop your skills regarding the proper use your trading platform while in simulation mode so as to minimize trading errors after you are trading your actual trading account.

Trading in simulation mode will help you to develop your confidence and an overall methodology that fits your personality.

Developing a Belief in Your Approach and Overcoming Fear:

Most traders will develop fear as they trade due to a history of losses. Like any fear, the way to overcome it is to continue to do what you fear the most. An advantage of having a trading platform that provides for simulation is that you will be able to trade in simulation mode to build a plausible plan and to develop more confidence in your approach to trading. As you trade in simulation mode, develop a set of notes that will act as the beginning of your trading plan. Trade in simulation mode until you have mastered the use of the trading platform you have chosen. As you trade in simulation mode, practice developing the discipline needed to execute your trading plan. Through repetition, you will begin to develop into a polished and successful trader.

By Steve Wheeler of NavTrader.com

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