3 Primary Rules for Swing Traders

12/14/2011 9:50 am EST

Focus: TRADING

David Paul

Partner, www.whichwaytoday.com

A trio of basic rules regarding viability of set-ups, trend following, and stop placement have governed the trading activities of David Paul, PhD for decades, he explains.

Dr. David Paul is my guest. Dr. Paul, I understand that you teach people how to trade. Walk me through that.

Yes, well I’m an engineer to start with. I started to trade way back in 1982, and I traded on my own until 1988.  I cut the corporate umbilical cord in 1988, and I’ve been trading on my own ever since.

What vehicles do you trade?

I trade shares over a view of three to four weeks—swing trades. I started to trade futures intraday as soon they became available to the intraday trader some 25 to 30 years ago. Over the last ten years, I’ve been trading forex quite aggressively, as that has become available to the smaller trader as the internet became commonplace.

How do you look at trades and decide what to do? What’s a good set-up for you?

Well, I’m primarily a trend follower, but I have three rules. The first rule is “A good trade is a hard trade.” The second rule is that I want to fade the short-term trend against the longer-term trend.

Why?

Invariably, before the market goes up—especially in the morning—before the market goes up, it goes down first. It goes down to the orders. 

The professionals would rather die than chase the market, so they will bid it, and they will bit it fairly low.  Anybody that panics has to get out of the bid. 

So invariably, before the market goes up, it goes down first. Many people believe that there’s somebody out to get them, but in fact that’s rubbish. It’s just professionals doing their job. 

If you’re Goldman Sachs and you bid the market and you control a considerable amount of liquidity in the market, the market will go to the orders.

And your third rule?

The third rule is that I want to put my entries where the masses put their stops. 

Most people will put their stops in very predictable places. If you’re an institutional trader, your job is to generate the liquidity to get in to the position. You just can’t press the button like us, so invariably, the market makers will not know where the stops are or they couldn’t be bothered to find out.

They know that most people will put their stop a tick or two below the last low, and invariably, the market will go to where the obvious stops are over and over and over again. 

So rule number three is where I want to put my entries after the obvious stops. The next time you’re going to put a trade on, just think “Where would I put my stop?” Just as you think that, pick something heavy up from your desk and smack it around your head! 

Rather than putting the order in, put the order in where you would have put your stop and just watch how many times the market goes to that.

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