My general approach to swing trading begins with the context of three general time frames that I use to govern all my trading. The three time frames relate to how often I have to make decisions to be effective: monthly, swing trading and intraday. I think of these as three separate and distinct environments with some overlap between them whereby one timeframe can provide actionable information to the adjacent timeframe and provide an additional edge.
I base my long-term, monthly rebalancing strategies on my research into relative strength and momentum among broad asset classes. By studying relative strength, I believe I can position the portfolio to take advantage of longer-term momentum.
I think of swing trading as positions I expect to hold from approximately 2 to 10 days. In this amount of time, I believe the buying and selling action of market participants creates short term momentum in order to establish a new consensus fair value, when price behavior returns to normal. These opportunities appear at various times in the market and can be defined by price patterns, statistics, and trade location.
I view intraday trading as tactical, statistics-based trading that takes into account trade location, critical states, price confirmation and a realistic assessment of typical reward to risk ratios. This is a style of trading that requires self-discipline, impulse control and a healthy appreciation for the primacy of risk management.
I believe that each of these time periods has information value that can contribute an advantage to trading in the other time periods. For example, broad index ETFs that are experiencing a healthy relative strength advantage over other indices in the monthly systems can be framed as swing trades in the shorter time — when we observe a continuation of the outperformance in that shorter time frame. Similarly, intraday trades that close well can often earn enough money to support a low risk speculative overnight trade which may develop into a multi-day swing trade if the momentum carries over from day one. We call this approach swing trading one day at a time. These swing trades are funded with markets money earned from the initial successful intraday trade. This position sizing strategy protects our seed capital.
It’s fair to say then that I think of swing trading first as short-term, opportunistic, statistics-based trading which can be supplemented by information coming from the longer-term and shorter-term time frames.
It can work in the other direction as well, with some swing trades that continue to outperform the market becoming longer-term holdings because of their continued relative strength. Other swing trade positions can be added to intraday when they are outperforming the market in the same direction as the primary trade.
This diagram represents this idea visually: