The Basic Principles of Swing Trading

Mar 12, 2012 Volume 30 Issue 8

The Basic Principles of Swing Trading by Jim Wyckoff "The Trend is Your Friend" is a tried and true market adage that is indeed one of the most valuable futures trading tenets. However, history shows that most markets tend to move in a non-trending, or "sideways" fashion more of the time than they are in a trending mode. There are several methods by which to trade non-trending markets. One

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popular method is called "swing trading." The basic principle for swing trading is finding a market that is trapped in a sideways trading range (also called a congestion area), or in an up-trending or down-trending channel on the chart. On the chart, the trader must be able to distinguish some clear support and resistance levels that are boundaries of the congestion area or channel. When a market price approaches the support or resistance area boundary, the trader will establish a position: long if prices are moving lower and close to the support boundary, and short if prices are moving higher and toward the resistance boundary. Swing trading techniques can be used in any chart time frame--daily, weekly, monthly and intra-day charts. However, the most popular timeframe for swing trading is the daily bar chart. It's important to note that the strength of the support and resistance at the boundaries is usually determined by the number of times the market has pivoted at the boundaries. The more times a market has reached a support or resistance boundary, and then reversed course, the more powerful is that boundary. Thus, a trader wants to find a well-established channel or trading range for which to attempt to swing trade. An exception to this is a market that has been in a trading range, but is bound by one or two powerful spike moves, which also indicate a strong support or resistance boundary. In other words, some congestion areas that may offer a good swing-trade opportunity do not require several pivot points. Instead, those one or two spike levels would be determined to be a potentially good pivot area for a market. The swing trader should still use tight protective stops. A good area to place a protective stop is just outside of a support or resistance boundary that makes up the trading channel or congestion area. For example, if a market in a trading channel is nearing the upper boundary of that channel, the swing trader would establish a short position and would want to place his protective buy stop just above the resistance level that serves as the upper boundary of the trading channel. Interestingly, if the market keeps moving higher and breaks out above the channel, or congestion area, (stopping the swing trader out of the market) then that would likely be considered an upside "breakout," which is a favorite trading set-up among many veteran position traders. This set-up would suggest establishing a long position if there was good follow-through buying strength the following session after the upside breakout from the congestion area or channel. The trader establishing the long position would place his protective sell stop just below the former upper boundary of the trading channel or congestion area that was just penetrated on the upside. About the Author Jim Wyckoff has been involved with the stock, financial and futures markets for more than 20 years. He was born and raised in Iowa, where he still resides. Wyckoff became a financial journalist with Futures World News for many years, cutting his teeth as a reporter on the futures trading floors in Chicago and New York, where he covered every futures market traded in the United States at one time or another. Not long after he began his career in financial journalism, he began studying technical analysis. By studying chart patterns and other technical indicators, he realized this approach to analyzing and trading markets could level the playing field between “professional insiders” in the markets and individual traders. His extensive studies of technical analysis and knowledge of markets led to several positions, including chief technical analyst at several well-known companies. He says his mission is not just to generate profits for traders but to also provide them with educational and insightful information because, in the fascinating business of trading, one never stops learning. Wyckoff received a Bachelor of Science degree at Iowa State University, graduating in 1984 with a major in journalism and a minor in economics. He and his wife have two children, a son in high school and a daughter in college. When he’s not analyzing markets and educating traders, Wyckoff says he loves adventures, from driving a Jeep across the highest mountain pass in the continental United States to extreme winter camping in the Boundary Waters to hiking in the jungles of South America.