Swing Trading, The Basics. Part 2: It’s All About Timing

SwingTrading1This is an exclusive extract from Michael Thomsett’s new book, Options for Swing Trading. We’ll be running extracts from Michael’s book all throughout November and you can even win yourself a copy by entering our competition here, or read on below for details on how to claim 30% discount through Littlefish FX.

Part 2: It’s All About Timing

Swing trading sounds easy, and the underlying premise is straightforward. But timing is never easy. With this in mind, the premise behind swing trading is not that you are going to be right 100% of the time, but that applying a few logical principles will improve the frequency of profits.

Every trader understands the distinction between misreading a chart and timing a chart. If you misread, it means you expect the price to move in one direction but instead it moves in the opposite direction. As common an error as this is, an equally frustrating one is that of incorrectly timing entry or exit of trades. You might be entirely right in your expectations of a trend’s direction and duration, but when do you enter a position and when do you exit?

Every trend (including the very short-term trend) is different and will perform in its own way. Some reversals, for example, occur quickly and turn sharply. Others provide a signal but experience a delay, and during this lag time leftover momentum keeps the price moving in the established direction before it turns. Other reversal signals are followed by a period of sideways movement before the trend reverses. And, of course, some reversal signals are quite strong and are accompanied by equally strong confirmation, but even so they turn out to be false signals.

Options for Swing TradingTiming is the key to improving your entry and exit success. However, you cannot expect 100% accuracy in entry or exit, and in some cases the outcome will mislead you. So the goal has to be to improve your timing, not to remove all risk. Here are some guidelines:

1. Diversify your trading risks. Traders fall into patterns, and one of the most destructive is to follow up a successful trade by doubling down, putting even more money at risk hoping for more profits. Remember that you can never achieve 100% perfect timing, and putting too much into a single trade eventually will create a very large loss. For this reason, your trade increments should be divided up so that a single loss will not be devastating.

2. Always act with confirmation. No trade should be entered or exited based on a single indicator. A basic premise underlying all technical analysis is especially applicable to swing trading: In a timing move, always require signal and confirmation before you act.

3. Rate signals based on strength and reliability. Some signals are exceptionally strong, whereas others have only about a 50% chance of being correct and cannot be used reliably. For example, a short list of candlestick reversal signals of exceptional reliability should include the engulfing pattern, three white soldiers, and three black crows. All of these occur often and are extremely reliable. Signals with closer to 50% reliability (harami and doji, for example) can be dismissed as leading signals, but when used to confirm other reversal signals they may have greater value.

4. There is nothing wrong with taking profits. It is easy to overlook the simple truth of this statement. Swing traders may easily become focused on the need to find a signal before they act. However, there is a distinction between a swing trade and a profit trade, for lack of better terms. In a swing trade, you expect timing to guide your judgment. In a profit trade, profits are taken when they materialize, even if the swing signal is not present. Thus, taking profits is a perfectly acceptable strategy even if it means timing was poor because greater profits could have been earned by waiting.

5. Once you see that timing was off, close the position. No strategic analysis will produce 100% perfect timing, and some portion of your trades will move in the wrong direction, often right after you commit capital. The purpose to a timing strategy is to improve the frequency of well-timed trades, but how do you manage trades that are not working? Avoid the tendency to stubbornly hold on even when you can see that the price is contradicting the signals. Cut your losses and close down the trade immediately and try again in different circumstances.
That is the smart swing trading move.

Stay tuned for Part Three: Short-Term Price Cycles, and enter our competition to win a copy of Options for Swing Trading here.

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