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Trading System: Swing Trading

The trading system known as swing trading, is an excellent way to take advantage of trending markets. We all know that markets fluctuate, up and down. The trick is to buy when they are down and sell when they are up, or the reverse when you are shorting. As long as you are willing to stay within the confines of a preexisting trend, then swing trading helps you set parameters within which to do your buying and selling. Again, as with most other trading systems, this futures trading strategy also applies to other markets such as stocks.

In this futures trading strategy, we begin by defining boundaries. Specifically, they are price ranges. More specifically, they are price channels and moving averages. There is no specific moving average setting, or price channel setting that works for everyone in all markets. This is where you must experiment with numbers until your chart looks something like the following futures chart for corn.

corn prices trending
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In this corn futures trading chart, focus on the main up-trending part for this futures trading system. Notice, in particular, the yellow line neatly tucked under the up-trending price and the purple lines that run both above and below the price movements. The yellow line is an exponential moving average. The purple lines are keltner channels. You don't have to use keltner channels for your price channel. You can use adjusted moving averages (+x/-x), or whatever overlay type indicator that you like. I like keltner channels because they are easy to use on my futures trading platform. Don't forget that which ever tool you use, you must adjust the numbers on both the moving average and the channels to fit the price movement of the market you are following.

Your goal is to have the moving average run just underneath the prices as they move in their uptrend, or just above prices as they move in a downtrend. You will see more examples later on this page. Your goal for the channels is to have them ride just above prices in an uptrend, or just below prices in a downtrend. The other channel line (lower in an uptrend, and upper in a downtrend) are not used.

In other words, you should see that prices are contained between the channel line we are using and the moving average. You may have the occasional poke-through, but about 90% of the price should be inside the "channel" you've created. It's these 10% poke-throughs that will determine our buying and selling.

The idea is that, in an uptrend, you will buy when prices approach or slightly penetrate the moving average running below the price. You will take your profits when prices go near the upper channel edge. In a downtrend you will sell when prices rise to the moving average running just above prices, and you will take your profits as prices approach the lower channel line. It is also a good idea to use a second confirming indicator like stochastics or force index to confirm that the touch-downs on the moving average are in fact likely to rebound. There is an absolutely excellent description of this technique in Alexander Elder's book "Come Into My Trading Room". Much of his book is based on this swing trading system.

We will see this futures trading strategy in a few examples, including a futures day trading example in a 60 minute time frame trading oil futures. Lets begin by looking at a gold prices chart that demonstrates gold futures trading.

swing trading example for gold futures
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Before anything, add an additional moving average to the chart (in this example it is blue). This moving average should be of a much slower period than the other moving average used to signal entries. I find a period around 100-200 usually works, but you have to experiment yourself with the market you want to trade. The purpose of this average is to indicate whether a market is in an uptrend or a downtrend. I know what you're saying "It's pretty clear to me this market is in an uptrend!", but you must watch this moving average for changes. As soon as it goes from up to down or down to up, even if it's just one tick, then you have to stop trading and re-evaluate trend direction and trading strategy (long or short or abstain). In this example of gold trading, the orange arrows indicate possible long entry points (buy areas). All but one are corroborated by the stochastics falling below the 50 line and indicating over sold tendency, where they are indicated by yellow circles. The secondary indicator (in this case stochastics) is only for confirmation, and you should use one you are familiar with. You want to exit your trade and take profits any time the price comes anywhere near the upper channel line (purple). Remember, there are usually several opportunities to trade in a trend using this trading system, so don't be shy about taking profits. I like to use trailing stops, so I aim for the upper channel line but I take profits as soon as the price starts backing away even if it didn't quite reach my target. Protective stops should be used, right from the beginning of a trade.

Next we will see how a price trend can change, and new swing trading opportunities can arise.

swing trading examples for rough rice futures

In this example of a daily price chart for rough rice, we see swing trading in both long and short trends. The first two orange arrows indicate potential long entry buy points. The first is corroborated by the stochastic (yellow circle). Opportunities to take profits were available both times.

About one-third into the chart, we see the blue slow moving average tick down for the first time. This signals a coming downtrend. Remember, you must adjust the settings of this moving average, as well as the settings of the other indicators, to fit properly into the markets you are analyzing.

Once the trend has been shown to be down by the slow moving average, it is time to start looking for short selling opportunities. These are indicated by downward pointing orange arrows as prices approach the yellow moving average. The first down pointing orange arrow could have been followed by a second almost immediately, but the prices were too far off the yellow moving average for my comfort. The last two downward pointing orange arrows were more "comfortable" entries. Notice that in this chart, the stochastics corroborations don't always go to or beyond the 50-line. This demonstrates that every market is different and you have to be familiar with your indicators and how they behave with the markets your trade. A good way to do this is to spend some time paper trading.

Next we will look at a 60 minute futures day trading chart of some crude oil futures.

swing trading example for crude oil futures

First, notice that the blue slow moving average indicates an uptrend right until near the end of the chart. The orange arrows all indicate potential entry point and are corroborated by the stochastics as being slightly oversold. This chart shows that trading oil futures, or any other futures, can be done in a variety of time frames using this swing trading system.

Notice on this chart that the last time the price approaches the moving average, it is not signaled by an orange entry arrow. One could have entered as it was first coming into range, but as the ticks went on a very lobe-like shape started to form in the stochastics. In my experience this usually precludes a trend shift. In contrast, all the previous stochastic corroborations were very sharp and pointy, indicating only brief "stabs" downward in price. This is an excellent example of why should get to know your secondary indicators and their "personalities" to maximize your experience with this trading system.

We have seen how you can use the trading system "swing trading" to engage in oil futures trading, how swing trading is one of many day trading strategies, we have also seen swing trading in action in rough rice and gold futures trading. As with all trading systems, be sure to make responsible use of stops so as to protect your money. It is always wise to engage in futures trading practice by paper trading before using any trading strategies or trading system with real money.

If you have found this futures trading strategy interesting, you may want to visit Swing Trade Stocks. It is a website that teaches swing trading using a different approach to the one described on this page. It is a very good website, and although it is aimed at stocks it can be applied to futures as well. You can read a review of the site here.


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Trading Strategies


Building a Trading Plan

MACD Divergence

Swing Trading

MACD & Swing Trading Futures Trading System

Trend Trading by the 10's

Choosing a Trading Time Frame

Example of Gold Swing Trading System