Why I Swing Trade

Laszlo recently wrote about his preferred method of trading – day trading, or holding positions from 10 to 90 minutes, and closing them out before the day’s trading is complete. I agree with his strategic reason, avoiding overnight risk, and his ability to make a living as a trader is all the proof one needs of his effectiveness. His trading method fits his life style and personality.

I approach trading from a slightly different perspective, having honed my skills as a position trader, and technical analyst, where idea generation and production alone could take a day or two. As a result, my preferred method of trading is to hold a positions from 2-7 days, and I’d like to explain the three major reasons why.

1.  Exploiting a Market Inefficiency – There’s a market inefficiency in my 2-7 day timeframe. What do I mean? Day traders will close out a trade at the end of the day, even if it’s fairly certain that the following day is likely to begin in their direction. And, institutional investors like mutual funds, pension funds, insurance companies or central banks may take days to enter a full position, and they’ll generally hold a position for far longer than a few days.

The Multi-Day Rally is Home of the Swing Trader
The Multi-Day Rally is Home of the Swing Trader

So, let’s say a day trader is long USDJPY; and a pension fund is also in the middle of five days’ worth of buying a long position. The day trader will be selling a position late in the day for “risk control” reasons, and the pension fund will be delaying part of its purchase till the following day for “cost averaging” or “not to move the market” purposes. In both cases, the absolute direction the following day is inconsequential to both actors. That’s where the swing trader can step into the market inefficiency. By buying a position late in the day from the day trader, and selling it in a day or two to the pension fund, a swing trader is taking advantage of “pure price action” and getting paid for taking overnight liquidity risk (See USDJPY chart).

2.  It Removes Impulsive Decisions – At one point in my trading career, I was trading S&P futures up to 25-30 times per day. I was using Elliott waves to call every single wave on 1 and 2-minute timeframe charts. It was exhausting, and by the end of the day, I was mentally fatigued. The last thing I wanted to do was look at and update my longer term charts when they wouldn’t really matter anyway. I got to the point where I was so close to the market I felt disconnected from it. In addition, I viewed inbound calls or emails as distractions, not opportunities for engagement and learning.

If you find that in your trading you’ve become overly impulsive, try to step back and trade less. That’s hard to do when you’re watching a short term chart, but pull back to a 30-minute or hourly bar chart, and wait for reversal and continuation bars to actually complete before pulling a trigger on a trade. You just may find better success, and more fulfillment, as I have. Whatever your time frame choice, just make sure it serves you, and that you’re using a robust method – like Elliott waves for Context, RSI for Momentum and Signals.

3.  Other Activities – As I mentioned above, I do like to engage with actual people during the day; although with email and Twitter one can engage with them electronically. I prefer to do research, talk to other traders, formulate ideas and occasionally work out mid-day rather than be tied to the screen all day long.

With my current method of swing trading, I now have plenty of opportunities for engagement, learning, planning; and, yes, I still check in with my charts multiple times per day, but my default time frame is mostly an hourly chart.

One item to note is that I’m in my winning trades a lot longer than my losing trades (3 days vs. less than 24 hours). I tend not to give my entries much room after a Signal and follow through bar, but I’ll let my winners run, and I’ll look to add to my winning trades along the way. I’ll never really add to a losing trade, unless it’s part of my entry plan, and it’s with the Context of a much larger wave.

So, that’s a bit about my trading method. But, it might not help you, because we like to say that you need to find YOUR method. We’d love to help you discover it, but you will never become a successful trader until you own YOUR failures, YOUR successes and YOUR own process.

Happy Trading!

The Wolf

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge. The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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