Swing Traders Insight

By Scott Hoffman

Introduction
This trading sheet is a guide to swing trading. By swing trading, I refer to trades
that are held longer than day trades but shorter than long-term trend followers. In swing trading you are looking to get into a trade one day, hold it overnight (or a few days) and get out as the momentum changes. A swing trader should always be working to minimize a loss and although the profits from trading in this timeframe are generally modest, hopefully the winning percentage is fairly high.

Swing trading has two modes. The first is swing trading which has its basis in
George Taylor Douglass book, The Taylor Trading Technique. Taylor was a floor trader at the CBOT who kept a detailed trading diary and developed a mechanical trading system from it. If you really want to get to know his take on the system, read the book. But be warned! Taylor was a dry writer and the book is a bear to wade through.

Taylors system is based on the premise that the market moves in two to three day timeframes, moving from a low to a high and back to a low. The other
important concepts are the importance of the previous days high and low, the length of upswings relative to downswings, and being a solely technical trader (ignoring fundamentals).

Cycle Day #1 Buying Day

The first day of the cycle is the buying day. Look for a buy day two days after a swing high(the highest high of the past few days). On a buy day, look for the market to make its lows first, finding support around yesterdays low. If the market opens flat to higher, look to buy the first sell off towards the previous low. If the market trades under yesterdays low, be careful about going home long. The market should close higher than where it opened. If it is making new lows late in the day, it is usually best to exit. You can often get in the next day at a better price. Generally, its good rule of thumb not to buy late in the day on a buy day if the market is heading lower or closing lower than where it opened. Odds favor a lower opening the next day, giving you a better enter price. Likewise, if the market is going to close lower than it opened, dont be afraid to liquidate your position. Odds are in your favor that youll be able to buy at a lower price the next day.

Buy day two days after swing high

Cycle Day #2 Selling Day

If you are long and the market is closing in your favor, carry your long position overnight. Odds favor a higher opening the next day setting up the selling day, the second day of the cycle. On the sell day you should look to sell into strength, liquidating your position, and going home flat. Often, the sell day trades on both sides in what I call a fade day. A fade day often follows a trend day and can be traded from either side.

Cycle Day #3 Sell Short Day

The third day of the cycle is the sell short day. The sell short day is the mirror image of the buying day. On a sell short day, you should be looking to sell early morning resistance, looking for resistance around the previous days high. Sell short day two days after buy day The market should not be making highs late in the day, if it is you should be able to get a better entry point the next day. On a sell short day, the market should close lower than it opened. The sell short day is often followed by a fade day. That is the gist of Taylors technique-a rhythm of buy-sell-sell short. I dont always recognize where we are in Taylors cycle (youre always learning!), but on days when it is clear, at the least it gives you a good indication of the markets bias for that day. In swing trading, the relation of the open to the close should indicate the direction of the next mornings opening. This helps you determine whether the odds favor being a buyer or a seller on a given day. Learn to anticipate what the market will do, not just react to what it does.

The previous days high and low are in the first columns of the trade sheet because that is where I start with my analysis. In the comments section I may point out a previous high or low because they are the next layer of support and resistance I look at. A test of a previous swing high or low is analogous to buying a previous

days low. Tests of previous swing highs and lows often are good trading opportunities, and have natural stop points. Swing trading is a good trading system most of the time. However, there are times when a market will stop its swings and move sharply in one direction. Knowing when these moves are coming can not only help keep you from stepping in front of a developing trend, they often give you an opportunity to catch a breakout. Fortunately, the market often tips its hand that such a move may be coming. Larry Williams observed that volatility is cyclical, that a period of low volatility is often a precursor to an increase in volatility. A reliable indicator of market activity and/or volatility is the days trading range. In Toby Crabels book, Day Trading with Short Term Price Patterns and Opening Rage Breakouts, He gives an alternate way to look for impending sharp moves. Crabel looked at daily trading ranges and found that days having small ranges in relation to recent days are often a good indicator of range expansion moves. He compared a days trading range to that of the previous seven and found that a day that had the smallest range was often followed by a sharp move.

Trading Breakout Days

A narrow range day signal is a good sign to not take swing trades. On these days (which I indicate in the range column), look to trade a breakout of the previous days range. Alternatively, you could look to trade a breakout of the first hours range the day after the signal day (this is how Crabel traded it). We dont know the direction the market will breakout, so approach these with an open mind! On a breakout day, I generally would look to enter the long side at the previous days high, and to enter the short side at the previous days low. On the day of entry, the opposite side will serve as the stop loss. If you are brave, stop and reverse at the other extreme. Reversals often tend to be even stronger signals as those who are suddenly on the wrong side of the market bail out pushing the market further.

Two narrow range days in a row!

Assuming the market is closing in your favor, carry the position home overnight. On the second day, move your stop to the low of the entry day (for a buy), or the high (for a sell). The objective for a long trade is the high of the entry day. I try to hold out for this objective. You are often catching a strong trend, and will likely get stronger movement in your favor.

Trading Fade Days

Conversely, a day that has the largest range of the previous seven has often spent its energy. These days are often followed by a day where moves tend to fizzle out and the market returns to where it started. On these days, morning moves can often be faded looking for the market to return to where it started. These wide range days often occur in conjunction with a fade day.

Fade day following a wide range day

The Range heading on the trade sheet is where I note breakout and fade day setups. Breakout days will be indicated by one of the following three abbreviations:

NR7 (Narrowest Range of the past seven days) 2. ID (Inside Day) 3. ID/NR (a combination of the two).
1. A fade day will be noted as WRD (Wide Range Day). If none of these patterns are present, I will leave this column blank.

An extreme example of a HL sale

3 HL down days!

The fifth column, H/L, is based on Larry Williams observation that a market that tends to open at one extreme and close at the other has a small chance of follow through the next day. For example, when a market opens on its low and closes on its high, there is a high probability that on the following day the previous days high will serve as good resistance and a test of the previous days high will be a good selling opportunity. The converse is true for a day that opens on its high and closes on its low. I define extreme as the upper and lower 20 percent of the range. As with the Range column, if there is no setup, I will leave that column blank.

The sixth column, VOL, looks at the ratio of historical volatility for a relatively short period and compares it to volatility over a longer average period. When volatility is small in relation to its longer-term average it is often a good sign that volatility will

increase and explosive moves often come out of these setups. I will put Low in this column on days when the volatility ratio is sufficiently low to warrant looking for a breakout.

Sell day 20 day high

In the Comments column I will sometimes point out a 20-day high or low. A classic breakout system looked to buy on the highest high or sell on the lowest low of the prior 20 days. These will often serve as a price objective for a trend and failed breakouts of 20-day highs/lows often give good short- term, low risk reversal trades. For the buy side, look for a market to trade under its lowest low of the past 20 days (make certain that this low hasnt been in the past few days). Look to buy when the market trades back up through the old low and use the extreme low as the initial stop point. You can also look to take this trade when a market closes on a new 20-day high/low and reverses through it the next day.

20 day low Buy day here

Trading Rules
1. 2. 3. 4. 5. 6. 7. 8. 9. Always look to minimize risk. Move stops in your favor as soon as possible. Your first loss is usually your best loss-get out of losers quickly. A good trade should be profitable quickly. Be cautious about taking losing trades home. You can often get back in the next day at a better price. Never average down a losing trade. Never say never and cant. Never trade without stops. Do your homework. There is no success without work. Have a game plan - learn to anticipate where the market will go, not react to it. Having no position is a position. Dont be afraid to be a spectator. The markets will always be there. If theres nothing to trade, dont trade!

10. Trade when you understand the market. If youre not sure, again, dont trade.

Abbreviations/Definitions/Explanations:
Buy Day: Look to buy early day weakness Sell Day: Look to exit longs on strength. Sell the first rally of a lower opening Sell Short Day: Look to sell early morning strength Scalp Only: Look to exit these trades quickly. Often these trades are going against a bigger term trend. ID: Inside day. Look for range expansion NR7 (or NR4): The narrowest day of the past 7 or 4 days. Look for breakout mode trades WRD: Wide range day. Look to fade early day moves. B and S: Look to buy or sell after an extreme range day. Low ADX: Trendless market-tough trading conditions. Exit Breakout Buys (or sells): Look to take profits on a breakout trade. 20-Day Highs or Lows: Market is approaching an important support or resistance area. Failed breakouts of these areas often generate good short term trend reversal trades. Triangle: Market is coiling up, expect volatility expansion.

References/Further Reading
Street Smarts: High Probability Short Term Trading Strategies
By Laurence Connors and Linda Raschke

The Taylor Trading Technique

By George Douglass Taylor

Day Trading with Short-Term Price Patterns & Opening Range Breakouts
By Toby Crabel

Contract Symbol Key

SP- S&P 500 NQ-NASDAQ 100 US-Treasury Bonds ED-Eurodollar (interest rate) JY-Japanese Yen EC- Euro Currency BP-British Pound CD-Canadian Dollar GC-Comex Gold SV-Comex Silver HG-Copper CO-Cocoa SB-Sugar KC-Coffee CT-Cotton CL-Crude Oil NG-Natural Gas LC-Live Cattle LH-Lean Hogs S-Soybeans W-Wheat (Chicago) C-Corn SM-Soymeal

Contract Month Symbol Key

F-January G-February H-March J-April K-May M-June N-July Q-August U-September V-October X-November Z-December

Scott Hoffman is a graduate of The University of Chicago with a degree in

Economics. Upon graduation, Scott worked on the floor of the Chicago Mercantile Exchange. After gaining valuable floor experience, he was promoted to the position of Personal Broker. During this segment of his career, Scott learned both trading and brokering from a 35-year industry veteran and former Chairman of the Chicago Board of Trade. His 16 years in the business have provided Scott with extensive knowledge of technical analysis as well as countless other trading and brokerage skills. In addition, he is an expert Tradestation user and has programmed and tested many indicators and systems.

Futures trading involves financial risk. Ones financial situation should be considered carefully before placing any trades.

550 West Jackson Blvd. 14th Floor Chicago, IL 60661 p: 800.800.3840 / 312.788.2400 www.danielstrading.com

Scott Hoffman p: 877.311.2862 / 312.756.4421 shoffman@danielstrading.com

Copyright 2003 Scott Hoffman. Reproduction without permission is strictly prohibited Disclaimer: This letter is strictly the opinion of its writer, and not necessarily those of Daniels Trading Group or Refco LLC and its management, and is intended solely for informative purposes and is not to be construed, under any circumstances, by implication or otherwise, as an offer to sell or a solicitation to buy or trade in any commodities or securities herein named. Information is obtained from sources believed to be reliable, but is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted. Security futures are not suitable for all customers. Futures trading involves risks and may not be suitable for everyone. Past performance is not indicative of future results. Daniels Trading is division of Refco, LLC.