Best Swing Trade Strategy

I can say with 100% assurance that the best swing trade strategy for you will be the one that you understand the best and which provides you with the most confidence that you have made a well reasoned decision to enter and exit the trade. That does not mean that you will win every trade, or even most trades, only that you have made the best decision you could with the information that was available to you.

We emphasized on the swing trading strategy page that the first step to developing the best swing trading strategy is compiling your stock lists or watch lists. This step is especially important if you will be trading options because bid-ask spreads can stretch to $100 or more per contract in thinly traded options, more than enough to kill an otherwise winning trade.

We sell swing trading software so naturally we think that the best swing trading system is the one that’s included in the software. I am not going to pitch the software but I can explain how I use the TO Oscillator method to exemplify the essentials of a good swing trading strategy.

What Time Frame Are You Trading In?

Let’s say that you have trimmed your watch list to 100 or even 50 symbols. Chances are that you are not going to be able or willing to spend your entire day, and I mean your entire day, clicking on stock charts to see if a trade trigger has executed. That means that you have to scan your list for trade setups, either visually or mechanically, at night after the market has closed, or in the morning before it opens.

This common and realistic lack of time available to discover trade setups begs a question. What time frame are you trading in? A swing trade is expected to last only a short period of time, from 2 to 20 bars. If you’re relying exclusively on 1 hour charts for your trading signals then you are not swing trading. You are day trading. The same stock trading tools may be applied in different time frames but the planning and expectations of the outcome cannot. Let’s assume that for our best swing trading strategy that our trading signals are based on daily bars.

When Do You Initiate A Swing Trade?

There are two initiating setups: the breakout and the reversal. They are as different from one another as night from day and each requires a completely different set of technical tools. We are going to limit our discussion to breakout trades because they are the most likely profitable setups, and because many reversal trades eventually turn into breakout trades, especially in counter trend swings.

What does price breakout from? One strategy will emphasize a prior swing high or low. Another may emphasize a particular chart pattern or a moving average. In the TO Oscillator we use a breakout from a fractal range as a requirement to initiate a trade. In plain English a fractal is 5 bar high or low. You can see in the image below when a trade would have been initiated in this XOP stock chart cutout.

Fractal range breakout best swing trade strategy

Swing Master/Options Master Chartist Fractal Range Breakout

The point is that the TO Oscillator strategy has an objective price level with little or no interpretation needed to see if this is a “good” or “bad” breakout.

When Do You Exit A Swing Trade?

There is no single, always correct answer to when is the right time to exit a trade. Some systems say to exit when a certain price objective has been met. Some systems set a dollar amount or a percentage amount as a stop loss to exit a losing (at the time) trade. I won’t quibble about the efficacy of setting absolute price or percentage levels so long as the chart itself confirms that this is a good time to exit the trade.

With the TO Oscillator strategy we make a decision whether or not to exit a trade when at least one of the following conditions is met:

  • You get a trading signal in the opposite direction.
  •  A balance line is violated in the opposite direction.
  •  Price has moved so far and so fast that a close trailing stop can be placed.
  •  You can objectively determine that the end of a trend is imminent.

It would be too much to try and explain here the exact meaning of each of those exit strategies. Suffice it to say that all of them can be determined objectively from what is happening on the stock chart itself. We do not know how far the stock or ETF will move when we initiate the trade. We want to give the trade its head (in horsey language) and let it take us where it wants to go rather than have us decide where it should go.

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