The Insights of Swing Trading
by Scott Hoffman, Senior Broker & CTA
Telltale Questions of “Deer in the Headlights” Trading Moments
As a futures trader, have you ever asked yourself any of the following questions?
- “What looks good and where should I get in?”
- “Uh-oh… I didn’t expect that… what should I do now?”
- “Do I want a stop and where should I put it?”
- “How should I get out?”
I call these “deer in the headlights” moments… when traders become surprised by market action or volatility, or have fundamental questions surrounding what to trade and how exactly to do so.
My experience as a commodity futures broker over the past 18 years has taught me that most traders wrestle with three very specific issues during their decision making process.
- When and how to enter a trade
- How to manage a trade once you have a position
- When and how to exit a trade
Get out of the Headlights - Answer the Questions and Gain Insight and Confidence
We all know what happens to deer that stay frozen in the headlights. If you have ever had questions similar to those above, hopefully this article will help you to gain a better understanding and command over the markets.
It is my goal to help traders to answer these questions for themselves and to approach each trading day with an active plan. By doing so, you’ll “get out of the headlights” and find that trading decisions that once used to baffle you are usually answered with some specific analysis.
What is Swing Trading?
The term “swing trading” is widely used by traders and can describe many different approaches to trading. In general, swing trading is a relatively short-term trading method that tries to take advantage of brief moves in the markets, entering the market as momentum “swings”, and getting out as it swings back. Swing trades generally have a one to five day timeframe.
The swing trading methods I use allow you to:
- Spot potential swing trading setups, helping you to anticipate both what the market may do and where it may go
- Establish a position with a defined plan to manage the trade
- Define flexible exit strategies that help you adapt to market conditions
The Benefits of Swing Trading
By learning how to anticipate what the markets might do and then, regardless of market direction, react to developments according to very specific trading rules, you’ll likely find that you no longer have so many questions about trading. Unlike the deer in the headlights trader, these characteristics are the telltale signs of a trader who has confidence and insight through their technique.
The Balanced Approach:
Technical Swing Trading While Recognizing Fundamentals
Pure technical traders often don’t look at any market news or fundamentals when making their decisions. The most common justification for this position is that past news or fundamental events are always represented in price action on charts. Therefore, it should be possible to purely examine a market based on its technical merit and any future moves that occur based on perceived fundamentals should be identifiable in advance with effective analysis.
I disagree with this position and believe that awareness of news and fundamental events that may have a (sometimes severe) impact on any given market should be given credence. In fact, I have found that often fundamental awareness can enhance technical study and ultimately lead to a greater level of trade preparedness and conviction.
Here is an example of how I will provide a fundamental “backdrop” to my trading newsletter services and help to give my clients an overall awareness of what to expect or understand about any given trading day or week. For this week (8/30 -9/3):
This may turn out to be one of the most important weeks of the remainder of the year for market moving news. All this week’s news, with the exception of Friday’s payroll numbers, will occur during the Republican convention, which will increase the focus paid on economic numbers. Labor Day is traditionally the start of the Presidential race, and strength or weakness in this week’s releases will frame the economic debate for the first month of the campaign.
The two “big” days to watch for are Wednesday and Friday. Wednesday has the ISM Manufacturing survey. The Chicago ISM Survey on Tuesday showed a slowdown in activity from June, and higher prices paid-not a good combination. This Friday’s payroll numbers are especially important, because they give insight as to how the 3rd Quarter is starting out and continued weakness in job growth could become a big factor in the Presidential race. Payrolls are expected to have risen by about 150k; a strong number will raise speculation of a rate hike at the Sept 21st FOMC meeting.
Beginning to Add the Technical Element
Thus far I’ve illustrated how fundamentals play a role in potentially anticipating how markets might behave, as well as preparing a trading response based on developments. The second half of the equation that I incorporate into my market analysis is technical studies, with an emphasis on key numbers such a support, resistance, volume, channels, ranges and potential breakouts.
Below is a sample of how technicals can be incorporated with fundamentals to paint a more balanced picture of any given market or sector. For the markets this week:
S&P 500 Futures
Stocks continue to be a low volume affair, as few traders want to make big commitments this early in the Presidential race. The 1100 area continues to be a pivot area for the market - bullish above, bearish below. Upside target would be 1120, downside is 1080. The NASDAQ has been weaker than the S&P, as traders remain wary of tech stocks.
Stock Index Futures Quotes + Charts
Bond Futures
Dec Bonds are breaking above 110-18 resistance, as they benefit from weaker economic numbers. I like the long side of bonds, and believe they could rally to the 113 area.
Bond Futures Quotes + Charts
Currency Futures
The Dollar broke in the face of weak economic numbers. The Eurocurrency has had a good rally off the bottom of its recent range and looks ready to rally further - 122 is the next objective. For the remainder of the week, the direction for the dollar will be determined by the ISM and payrolls.
Currency Futures Quotes + Charts
Metal Futures
The US Dollar and Crude Oil are key to Gold and Silver prices. Gold held $405 support on Friday, we're now trying to take out resistance at $412.50. Silver has support at $6.60 basis December, we’ve had a pattern of higher highs and higher lows since June, but it’ll take a rally over $7 to really get the silver bugs excited.
Metal Futures Quotes + Charts
Crude Oil Futures
The market is pulled in two directions - long liquidation and new supply concerns. The $41 to $42 area should provide good support for the time being. The latest Commitment of Traders showed a big drop in the fund long position in Crude Oil, which could provide fuel for a new rally.
Crude Oil Futures Quotes + Charts
Putting It All Together With Swing Trading Techniques
We have discussed how a combination of fundamental and technical awareness can paint a fairly informative view of any given market and how that level of analysis can potentially aid a trader in anticipating future market activity, as well as preparing a measured response to developments. But where does Swing Trading fit in?
I prefer to conduct my swing trading technical analysis on daily bars and scan for very specific patterns that may indicate consolidation, momentum changes and ultimately potential breakouts. There are many specific patterns that I look for, all of which help me to anticipate potential future moves along with specific rules for entering, managing and exiting trades. Detailed information and examples of these indicators are available through the Swing Trader’s Insight free trial offered in this email, however, below are some examples indicating the depth of swing trading analysis that I provide.
S&P 500 Futures
The first example is the S&P. A tip-off to the latest rally occurred on August 12th and 13th, as the market went back to retest the low, but momentum was making a higher low. The divergence of price and momentum was a good indicator that the selloff might be over, as the market soon proved. Next, note how the pullback of the momentum indicator to zero (shown at point A), set up a good buying opportunity, as the market’s correction came to an end. Finally, the narrow range day last Thursday (labeled B), set up a breakout day on Friday, which resulted in a decent rally. Finally, notice that on Friday, as prices rose, momentum declined, indicating market weakness.
S&P 500 Futures Quotes + Charts
Cattle Futures
The latest cattle rally ended in a narrow range and inside day combination on August 16th (labeled A). This gave a good selling opportunity on August 17th, and the market proceeded to sell off 345 points in 3 days. The wide range bar of August 19th would have been a good day to cover shorts, as wide range days are often climax days. The 19th was also a (temporarily) successful retest of the last swing lows from the beginning of the month. The 20th (labeled B) was also a narrow range/inside day, giving another breakout trade opportunity, which has resulted in a 347 point selloff. Notice the wide range reversal on Monday (labeled C), which showed that a bottom was at hand.Cattle Futures Quotes + Charts
Soybean Futures
The recent chart of November Soybeans showed another good breakout pattern. Soybeans traced out a small triangle on August 17th through the 20th, culminating in a narrow range/inside day setup on August 20th. The resulting breakout rally on the 23rd was nearly 34 cents. Triangles such as these are good chart formations to look for and don’t require the use of any indicators to spot them.
Soybean Futures Quotes + Charts
Hog Futures
The hog market has been selling off for much of August. In the chart below, note that from August 18th to the 20th, the market had a three day countertrend rally of higher highs and higher lows (labeled A to B). I call these countertrend moves flags - a bear flag in a downtrend, a bull flag in a uptrend. These flags are corrections in a trending market. We look for the termination of the flag and resumption of the major trend as a spot to reenter the market in the direction of the main trend.
In this case, we were looking for a penetration on the August 20th low as a short entry, which proved to be a good entry point. Flag formations are another good visual pattern to look for. The inside day/narrow range day pattern on Friday provided a good tradable pattern for Monday (Day C).
Hog Futures Quotes + Charts
In Summary…
By working to create a comprehensive picture of the market using both fundamental considerations and very specific technical swing trading patterns, it is possible to achieve a more dynamic level of trading. Once again, I have found this method often solves the 3 classic trading difficulties discussed in the beginning of this article and may very well put you on your way to no longer being a “deer in the headlights” trader.
About the Author
Scott Hoffman is a Senior Broker and CTA with Daniels Trading. After graduating from the University of Chicago in 1986 with a degree in Economics, Scott worked on the floor of the Chicago Mercantile Exchange. Following his time at the CME, Scott went to work off the floor, serving as the personal broker to a former chairman of the Chicago Board of Trade. Here Scott learned the trading and brokering business, a process that he continues to expand and refine.
Scott is the publisher of Swing Trader’s Insight, a comprehensive swing trading advisory service covering all of the major futures markets. In addition to a nightly newsletter, Swing Trader’s Insight provides in-depth client education complete with specific trade recommendations and market analysis, including an S&P Morning Insight commentary, Midday Updates and Trade Management Updates. Although Scott specializes in swing trading, he has years of brokerage experience that is available to all of his clients, regardless of their individual trading styles.
PLEASE NOTE THAT THERE IS AN INHERENT RISK OF LOSS ASSOCIATED WITH OPTION CONTRACTS. OPTIONS TRADING IS NOT SUITABLE FOR ALL INVESTORS. OPTIONS CAN AND DO EXPIRE WORTHLESS. IF YOU PURCHASE A COMMODITY OPTION, YOU MAY SUSTAIN A TOTAL LOSS OF THE PREMIMUM AND OF ALL TRANSACTION COSTS.
