Trading the Swings

Swing charts provide an excellent way of analysing the price movement in any underlying market. Shares, futures or foreign exchange price movement can all be monitored by the use of a swing chart. Trading directionally in other vehicles like options and warrants also requires a firm grasp on the movement of their underlying markets.

The question that comes to mind is what sort of swing chart to use. Safety in the Market clients are familiar with different time frames in using their swing charts. Daily or weekly swings, 2 or 3 day swing charts even X point swing charts. What is the best variable to use? The answer will depend on what market you are looking at and what time frame that you are looking to trade on.

If you are looking to take fewer trades then a longer time frame on your swing chart will achieve this for you. A longer time frame will also give you a larger reference range to work with.

The larger reference range is something that we are looking for when we are trading shares. This was a concept that Noel dealt with in his article last week, suggesting that you can look at a weekly time frame to increase your time frame and reduce slippage. Taking another view is to look at a 2 day swing chart for example. The reason I have chosen a 2 day swing chart, is that over recent weeks in the equities market we have seen a number of strongly trending shares. The 1 day swing chart has signalled a number of entries into the market. In some cases, these trades would have benefited from delaying our entry until we had confirmed a swing in our 2 day chart. In the charts below I will highlight the different trading opportunities on the same market using different swing time frames.

SGB below shows a weekly chart we would have only seen for one trade this year using our ABC entries. This in turn means we have missed the large Bull Run in 2003.

SGB on a daily swing time frame shows a number of long trades presented using ABC entries. Out of seven long trades from February to late June, six were profitable. They were all stopped out at our 50% and 75% milestones with the one exception being the losing trade. These trades were profitable, however, being stopped out on a 1 day swing chart only to see the market move once again in the direction of the trend is something that a 2 day swing chart can help avoid. A 2 day swing chart can filter out these early exits and allows us to hang in the trade, mainly as we have a larger reference range to work with. Let’s compare these results with a 2 day swing chart.

The 2 day swing chart as we have discussed gives us a larger reference range to work with and less trades to select and manage. SGB on a 2 day swing chart signalled five long ABC trades over the same period and four were winning trades with one losing trade. The major difference in these trades was the levels we were being stopped out at. All exits were above the 100% milestone, the trend was strong and the larger reference ranges helped us to stay in the trades longer than on a 1 day swing chart.

In the case of SGB, we could review the same period using a 3 day swing chart for example to assess its performance. There is no simple way to know what periods will work best, the easiest way to determine a way forward is to backtest the different scenarios and see what works best for each individual markets. If you can identify a strongly trending market, a larger time frame on our chart can secure more profit from the run as it filters out valid exits from the smaller time frame. Swing charts give us this type of flexibility that is not available in other chart types as we can work with multiple time frames other than daily, weekly or monthly for example.

For those who utilise swing charts on equities, using 2 or 3 day swing charts may offer you a way forward to allow for greater reference ranges in your trading and the capability to filter out moves against the trend that may see an early exit. This also ensures that you are not left with very infrequent trading opportunities that can occur if trading on weekly time frames

Good Trading

Aaron Lynch