Getting into the Swing
In this example it would have made sense for the trader to place protective stop orders to buy at 7500 (to close any prevailing short position) and to sell at 7100 (to close any prevailing long position) as shown in the following chart:
EXAMPLE: DAX
“X” marks the spot at which the swing trader’s final long trade would have been stopped out when the price broke downwards out of the trading range and embarked on what looked like a sustained downtrend. He would have lost £100 per £1-per-point staked, which — considering his £1600 accumulated profits (scale to your tastes) — would have been a small price to pay for the assurance of sidestepping the falling market. Taking this one final stage further, we could envisage a stop order that not only takes the swing trader out of the position, but also takes him net short (in this case) when the final swing turns into a trend.
It’s a swinging market that, hypothetically, I caught early. But, of course, for the purposes of this article, I had the luxury of perfect hindsight in choosing the best market (and timescale) to demonstrate the principle. The problem is that once you have observed that a market is swinging — after say three decisive swings, just to be sure — it may be too late for you to take advantage of your observation. The market may be just about ripe to stop swinging and start trending. Just like in my example. But still, some traders make good money by “getting into the swing”. Maybe you can too!
EvERyThiNg iN ThE SWiNg TRaDiNg gaRDEN iSN’T RoSy I’ve painted a rather rosy picture of swing trading, based on a market that has been swinging very nicely between clearly identified support and resistance levels over the medium term.
January 2013
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