Swing is Still the Thing

By D. R. Barton, Jr.

Reprinted from the June 2, 2004 Tharp's Thoughts Edition

"Opportunity is missed by most people because it is dressed in overalls and looks like work." --Thomas Alva Edison

I am afraid that many people that I talk with want to learn to trade or invest well because it is seen as the easy road to riches.  I think trading can be fulfilling, mentally challenging, frustrating, exhilarating and boring.  But I have never heard one top trader say that it was easy.

If you have decided to read further, let me tell you that there are shortcuts one can take around the potholes in the path of learning.  One such shortcut is a tried and true method that Van is fond of and that NLP practitioners make their stock in trade.  This key shortcut is modeling those who have successfully done what you’d like to learn.

Let’s look at modeling someone who is a really good swing trader.  His name is Brad Martin and he’s one of the best traders that I know.  Brad cut his teeth trading on the floors of the Chicago Board of Trade and of the Chicago Mercantile exchange.  Bad knees and a sense that open outcry is a dying means of transacting market trades drove Brad behind the monitor, and he has been a successful electronic trader for the past seven years.  But before we look at modeling some the things that make Brad a trader’s trader, let’s look a some key aspects of swing trading.

Swing trading is one of the hottest areas of trading.  I did a search on the phrase “swing trading” on Amazon today and it turned up 58 books.  That’s a bunch for an area that was once considered to be a specialty.  Swing trading can be roughly defined as catching the “swings” in market price in a time frame that is between an overnight trade and 10 – 20 days (depending on who is doing the defining).  In short, swing trading looks to catch intermediate trends or intermediate reactions against trends.

The swing style of trading has become very appealing to a large number of people for several reasons

§  Swing trading strategies can fit into almost anyone’s schedule.  Screening can be done and orders can be placed or moved before or after market hours.

§       Swing time frames can present many more opportunities than longer term trading while,

§  Transaction costs in swing trading are less significant than in day trading

§  There are swing trading styles for almost any type of trader: trend followers, counter trend players, channel traders – the variety is almost endless.

So let’s get back to how to do swing trading well.  Brad Martin has really had an impressive resume as a trader.  I have had the rare privilege of modeling his trading thought processes and strategies and have included these thoughts in our Proven Tactics of Swing Trading workshop that the Van Tharp Institute is sponsoring in late June.

Let’s look at some of the things that Brad does that any trader can model.  You can call these shortcuts to learning the key points of trading craft:

§   Brad follows a plan.  Every morning Brad charts out his plan for the day.  He develops an expectation for market direction and puts together a list of stocks that he would like to trade if the market moves according to his expectation.

§   Brad is not married to his market view.  Brad is already married to his wonderful wife, Karen. Yet I digress.  If the market moves contrary to Brad’s expectation, his daily plan includes a list of stocks that he will turn to.  This makes him very flexible and he is rarely caught off-guard by the market.

§   Brad keeps his stops with a ruthless determination.  Every workshop we do together, Brad does a session on keeping stops.  His stories and well directed rants have turned more than a few people into faithful stop-keepers.

§   Brad has a disciplined work ethic.  Despite the fact that Brad has been in this business over 20 years, he still spends time every morning and every evening reviewing individual charts.  This is the work that most people want to avoid.  Don’t do it!  As Edison admonished us in our opening quote, this is where opportunities show up with great regularity – if we’ll only put on the overalls and roll up our sleeves.

Swing trading can be very rewarding.  It fits in everyone’s schedule and offers opportunities to catch lots of moves that longer-term players miss.  Follow the key steps that Brad uses and you could find yourself trading at a new level.

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Swing Trading – The Best of Both Worlds?

by  D. R. Barton, Jr

“The optimist proclaims that we live in the best of all possible worlds; the pessimist fears this is true."

                                                            --James Branch Cabell, author

Long-term position trading and intra-day trading each have their own advantages.  Many people gravitate to one camp or the other and very few people trade in both of those worlds.  But the intermediate time frame, what most folks call “swing trading”, may just be the best of both worlds.

Long-term trading (also called position trading) has several advantages.  Once the trade is entered, it can usually be managed with very little time and effort.  A check once a week may be all that is required.  In addition, people who are effective in long time frames usually get that way by finding really large winners every once in a while.  Catching a long-term trend and riding it for a big return is the style of trading that has made many of the best-known traders famous (and wealthy). 

The negative aspects of long-term trading usually include a low percentage of winners, long-term market exposure (and the accompanying inherent risk of being in the markets), and the need for a greater starting equity because more capital is required to live through the longer and deeper drawdowns that are typical of this type of trading.

Day traders have several things going for them, as well.  Their high frequency of trade typically results in a smoother equity curve with lower drawdowns.  Day traders have lower risk levels (because they do not hold trades over night) and are afforded higher leverage as a reward for this reduced risk.  Successful day trading systems typically enjoy higher winning percentages than longer-term systems.

Day trading has its disadvantages, of course.  Higher leverage combined with greater trading frequency means that negative expectancy systems get punished faster and harder.  Day traders rarely catch monster moves, but subsist on smaller more consistent wins.  And day trading certainly can be time consuming on a daily basis.

Swing trading fills the gap between these time frames and enjoys the benefits of both of the styles described above.  Swing trading is loosely defined as trading to take advantage of the intermediate trend, typically 2 – 10 days.

Swing trading has the benefit of high trade frequency, which can help to smooth equity curves.  Many types of swing trading capture a higher percentage of winners than the typical position trading strategy, while keeping the benefit of requiring little to no intra-trade baby sitting.  With swing trading, we get the increased frequency with monitoring that can typically be done outside of trading hours.

And while there are few traders who combine position trading and day trading, I know many day traders who also swing trade and find the styles very complimentary.  I also know long-term position traders who add a swing trading component to their portfolio so they can smooth out their equity curve, especially in choppy or directionless markets.

Next week we’ll talk about some of the swing trading styles that are working in today’s markets.

Swing Trading – What’s Working Today?

by  D. R. Barton, Jr

“Maybe the trend is your friend for a few minutes in Chicago, but for the most part it is rarely a way to get rich" --Market Wizard Jim Rogers

Last week we looked at an overview of swing trading and how it combines the best attributes of short and long-term trading.  There are many styles, systems and strategies that you can use for swing trading.  Today, we’ll look at a couple that are working quite well in the current markets.

Market background.  The market has basically been trading in two narrow ranges for the last 18 months.  From the beginning of 2004 until early November of that year, the market traded within a 100-point range, from 1060 to 1163 (these numbers represent the S&P 500 cash index).  It then broke above that range (but modestly so) and has been trading in yet another 100-point range ever since, this time between 1136 and 1230.

By almost any accounting, this has been a market stuck in very tight ranges.  For comparison, the ranges for the years 2000, 2001, 2002 and 2003 were 300, 400, 400 and 300 points, respectively!

Here are the best ways that we have found to play these tighter market conditions:

The best of the best – fading short-term extremes.  The market still has strings where it runs up or downs and forms an intermediate trend.  In general, it then reverses after these quick runs.  So we have had success fading (trading against) the short–to-intermediate term trend.

Most folks agree that trading within a channel or fading tests of channel highs and lows are good plays in a tight, generally trend-less market and we have found this to be the case.  The system we have been using to make some nice gains will be discussed at length in a future “Tharp’s Thoughts”, so stay tuned for that.

Short-term breakouts.  Playing breakouts has been a very tough game in the last 18 months, but under specific circumstances there have been some good plays.  The best conditions have been to reverse a failed channel tests and playing breakouts on hot sectors (like energy and housing).

We continue to like finding intermediate term over-extended points in the market and then watching for a confirmation that the over-extension is correcting itself.  That becomes our entry point.  For breakout players, we can only recommend caution and reduced position size for now.