Swing Trading Systems

Last updated on June 12th, 2015


For either a casual trader, an individual with significant work commitments or a day trader wishing to spread their wings, swing trading is a great way to go. Simply put, swing trading is taking short term positions which complete over the course of several days. It’s kinda like zooming out of the picture a little and looking at longer timeframe bars. Classically, the idea is to trade with the prevailing trend after a minor pullback so long as there hasn’t been a sharp reversal at the extreme. But the key is that you are trading over days rather than minutes/hours or months/years. There are however, some important considerations for anyone who is looking to trade in this way.


“A chart is a chart is a chart”, technical traders will say and I believe they are right. From a purely technical standpoint, markets viewed in different timeframes are effectively fractals of themselves – i.e. they exhibit similar behavior on a smaller or larger scale dependent on the timeframe they are viewed in. A trend on a 5 min chart has very similar characteristics as one on a daily chart. Really this comes down to the fact that the markets are auctions and human nature characterizes these auctions. So whether you have an ultra-short term intraday trader or a swing trader, the principles remain the same.


As much as markets are very similar on any timeframe, there are many differences to how you’re able to trade them. The frequency of available trades is going to be a really big consideration for example. Of course you could trade bigger size when you do get a setup in order to compensate for this. However, there are two drawbacks to this. The first is that by trading bigger you are risking a bigger percentage of your capital and if you hit a losing streak, just as in day trading you could see a detrimentally large chunk of your trading capital wiped out. The second issue is that regardless of the size you trade, if your edge has very few trades then your sample might not be big enough to properly assess the efficacy of the strategy and you might not be able to take enough trades in order to assess how the system works in the real world. The key is going to be to find a simple and robust enough system that allows you to trade many different instruments simultaneously and therefore generate sufficient trading opportunities.

There’s a really good aspect to this point too. By trading different instruments, you are able to diversify your trading and so mitigate the risk associated with one type of instrument going into drawdown. If you were trading Crude Oil for example, you’d be exposed to certain risks in the market. If you traded Crude Oil, Nat Gas, Brent Crude and Gasoline you’d be exposed to similar risks. If you chose to trade Crude, Apple, Wheat and the Mexican Peso for example then you’d likely be exposed to a variety of risk factors thereby diluting your level of risks to single events. With a decent enough sized account and a bit of thought, you’ll be able to trade in this way.


But there are other risk factors to contend with. One risk in particular is gap risk. Because products don’t trade 24 hours a day for the most part, but the world doesn’t just stop when they aren’t trading, products can change in value between the close of one session and the open of the next session. Sometimes this is dramatic in extent. So this means that if you have a stop order and the market gaps through your stop, you won’t get filled at the stop price and you’ll potentially lose an awful lot more than you had originally planned for. This is not dissimilar to getting a poor fill on a stop order if you day trade. If another trader places an order of large enough size which takes the current price through your stop, you’ll get filled at the next available price. The trouble with gaps is that lots of markets can become correlated all at the same time when events that have a major impact on a global scale are taking place. So this would include the current situation in the Middle East, a major terror event or an unexpected rate move by a major economy. Also for stocks, pre-market earnings announcements can make a stock gap up or down in dramatic fashion. Whatever the product is, it’s important to be fully aware of the sorts of things that can cause these types of moves.

Capitalization – No matter how you trade you still need to be managing your risk and your capital in an appropriate manner. The fact is that that you are likely to need to have more capital to maintain the same levels of risk than if you were day trading. Undercapitalization is a significant account killer and should always be addressed.

Expiration risk – If you’re going to be swing trading derivatives, you need to take account of contract expiry (where the current contract stops trading and the new contract takes over) and the chance it will ruin good trades. Ensuring you are trading outside the expiry window is essential.

Phase Change – All markets have different phases based on levels volatility and balance. Day trading strategies might be susceptible to a shift from one phase to another, but swing trading could be more so. The saving grace is that you can if your strategy is robust enough, look to trade products in the ideal phase.

Emotions – Emotions are still emotions. Just because you’re not going to be necessarily sitting in front of your trading screens as much as you might be if you were day trading, it doesn’t mean you won’t experience the same stresses. The fact is that you are still financially and egotistically exposed to the markets when you are in a trade. Don’t assume otherwise.

Swing trading is just another method a trader might look to use to make money. It’s fundamentally the same as any other type of trading, but it also has a few differences. By taking the time and effort to learn the nuances, a trader can certainly profit from this great way to trade.

Trade well.

Find The Best Swing Trading Courses Online