Many people who want to learn how to trade wonder whether swing trading is a trading form that suits them. They want something that’s not too complicated, that still has great profit potential.
Swing trading isn’t very hard once you have a trading strategy in place. While discretionary swing trading is very hard to learn, it’s easier to go with a systematic approach. The hardest part of swing trading is to build your own swing trading strategy and stick with it. However, if you buy a strategy that’s ready to trade, you could be up and running very quickly.
In this article, we’ll look at what type of swing trading you should focus on to make it all as easy as possible for you. We’re also going to cover how to overcome the most common challenges. Some of them are challenges that most traders never even learn to identify!
Discretionary Swing Trading: Why You Should Look Elsewhere
If you look around on the Internet and watch some videos, you see a lot of people talking about their discretionary swing trading methods. They talk about trend lines, trading indicators, and tell you how and when to enter a trade for maximum profit.
However, most of those people don’t even know how to trade themselves. What they are presenting you with are old and out-dated technical analysis methods that either don’t work anymore, or never have worked.
The markets are becoming ever more efficient, meaning that the edges are waning and replaced with more randomness. And it’s in that puddle of randomness where you are looking to extract tradable trading strategies that aren’t the result of the random market movements.
And as you might understand, doing that by just watching charts, and acquiring a sense for where the market is heading, is incredibly difficult nowadays, if not close to impossible.
Systematic Swing Trading: The Solution
Many traders are stuck in the belief that discretionary swing trading is the way to go. However, for us who have backtested many of the concepts that are taught and advocated by the so-called “trading gurus” , we seldom find something of value in those concepts.
What we also have found from our own testing, is that it’s really hard to know what’s going to work, and what’s not.
Of course, we have a general understanding of what works and not with the things we’ve tested, but when trying new things that we haven’t looked into before, we are close to clueless!
You cannot derive what’s going to work by using common sense. The only way of knowing what works is to adopt a systematic approach. So what do we mean by this?
Systematic Trading And Why It’s Superior
As a systematic trader, you don’t rely on your gut feeling. Instead, you backtest your idea on historical data and see if it has worked historically, or not. For example, if we tested an idea, and got the equity curve below, then that would be a good indication that we are on the right track.
Now, this means that you suddenly can create trading strategies that rely on a real edge in the market. That is, now you have a real chance of success, and can put those concepts you’ve believed in under scrutiny. We are quite certain that you will find that very little works as you expected.
Most things will show no edge at all, and you will be thankful that you tested it before you went live with real money.
However, when you finally have your strategy, things start to get easier. You then just follow the rules of the strategy, and you’re ready to take the signals. If you insert your strategy into a stock screening service, your trading routine doesn’t need to take more time than 15 minutes each day.
You just scan the markets for the entry condition that your swing trading strategy uses, and then take the signals that show up in the scanner. This can easily be done anytime after the market has closed. You just need to be sure to place your orders for the next market open!
The Hard and Difficult Parts of Systematic Swing Trading
While systematic swing trading is the way to go, it’s not without challenges. Even if swing trading indeed is one of the most beginner-friendly and easy trading forms, it’s not a simple plug-and-play solution.
Here are some of the biggest challenges you’re going to face as swing trader:
1. You Have to Follow the Rules
The premise of systematic swing trading is that you take the trades that your strategy gives you. There is no room for spontaneous discretion if that’s not a part of your trading plan already.
Taking the trades when things are going well is something that most people manage well. However, it’s when you’re in a drawdown and fear further losses that it may be hard to stick with the strategy!
As you might have guessed already from the previous point, what proves to be a hindrance often is yourself. The emotional pressures that trading imposes on you could be immense and need to be dealt with. It’s hard to anticipate the feeling of a future drawdown if you never have experienced one yourself. That’s why we recommend that you take it easy in the beginning.
Remember, trading is a marathon, not a sprint. It is perfectly fine and completely normal to make mistakes in the beginning. As such, you should start small, so that those mistakes don’t cost you too much!
3. You Have to Make the Strategy Robust
As we explained, one of the biggest advantages of systematic swing trading is that you know your odds before you trade a strategy.
However, when backtesting you run the risk of curve fitting the strategy. In short, this means that the strategy won’t work, because the results you saw were just random luck, and nothing else. Much of the market action is random, and if your strategy rules happen to catch some random patterns in the market, then the backtest results could fool you.
If you only start considering the robustness of the strategies you build, then you have come further than most swing traders ever will come.
At the end of the article, we’ll link to more resources where you can read more on this, and how to ensure the robustness of the strategies you build.
4. You Must Manage Your Risk Carefully!
This part isn’t that hard, but what we often see with new traders, is that they risk too much on every trade.
One good rule of thumb is to not risk more than 2% of the account on one trade. That way you will cope with a long streak of losing trades, and still remain with enough capital to continue trading!
If you’re starting out in the world of trading, then swing trading is the perfect choice for you! It’s easy when compared to other trading forms, and offers great profit potential. It’s also possible to combine with a full-time job, since the order execution takes so little time, and only requires you to be by your computer after the market has closed.
Just remember to go with a systematic approach. Doing so will multiply your odds of success manyfold, and make swing trading much easier for you in the long run. Discretionary swing trading indeed is hard, and is becoming increasingly more difficult as the markets get more efficient.
In our complete guide to swing trading, we go in-depth on many of the topics we just touched upon in this article.