What is Swing Trading?
Swing trading is a trading style that falls between day trading and position trading. The goal of swing trading is to profit from price "swings" or fluctuations in the market, typically holding positions for several days to weeks.
Why Swing Trade?
Some traders prefer swing trading to day trading because it requires less time and constant monitoring. Swing traders hold positions for several days to weeks, allowing them to analyze the market with more patience and less stress. This approach is more flexible for those with other commitments and can capture larger price movements, potentially leading to bigger profits compared to the smaller, quick trades typical of day trading.
Getting Started with Swing Trading
Before you begin swing trading, it is essential to understand key concepts like Supply and Demand, Options Greeks and Risk Management. You can find lessons on these topics throughout the Resources Hub.
Trade Metrics
My approach to Swing Trading, much like 0DTE, is rooted in a systematic perspective, which means that I have a structured and disciplined approach to analyzing and making trading decisions.
As a matter of fact, the decision-making process is largely the same as our 0DTE processes, utilizing cycles (overbought/oversold) and the Gamma framework to identify control via the Flip and critical supply and demand zones.
There are additional metrics such as 4-Hour Trend, 1-Hour Trend, Volatility Risk Premium (VRP), 5-Day Implied Move, Average True Range (ATR) that can assist us in our decision-making process.
These metrics are available in our Daily Market Report within our Key Metrics table and are explained ‘here’.
Trending or Counter Trend
As always, it's critical to determine whether the opportunity aligns with the current trend or is counter-trend.
Trend: A trend refers to the prevailing direction in which a stock's price is moving over a period of time. It can be either an upward (bullish) trend, where prices are making a series of higher highs and higher lows, or a downward (bearish) trend, where prices are making a series of lower highs and lower lows.
Counter Trend: Counter trend refers to a strategy that goes against the prevailing direction of the market trend.
A simple method for identifying market trends involves using Simple Moving Averages (SMAs). My personal preference is the 50SMA and 100SMA for the short-term trend, and the 100SMA and 150SMA for the intermediate-term trend.
When the 50SMA is above the 100SMA and sloping upward or flat, it signifies an uptrend.
Conversely, when the 50SMA is below the 100SMA and sloping downward or flat, it signifies a downtrend.
*The slope of the trend is more important than the crossover.
The same logic applies to any set of moving averages, such as the 20SMA and 50SMA or 8SMA and 16SMA However, lower time frames and periods, yield more sensitive signals.
Utilizing Heikin Ashi candles can reduce noise, smooth out price action, and make trends more visible.
Heikin Ashi candles are a type of Japanese candlestick charting technique that smooths price data to provide a clearer visual representation of trends and reversals in financial markets.
When choosing to play counter-trend, it's advisable to give more weight to higher timeframes, such as the 4-hour (4H), and daily (D) charts. Ensure these timeframes are also at extremes (cycle highs/lows) and that the price is extended from its longer-period moving averages, such as the 150SMA.
Volatility Flip
The Flip is a transitional strike where we anticipate a change in dealer hedging and, subsequently, a change in the volatility regime.
If the price is below the Flip level, dealers hedge via selling weakness and buying strength leading to higher volatility.
If the price is above the Flip level, dealers hedge via buying weakness and selling strength leading to lower volatility.
When trading, it is generally more attractive to buy dips above the Flip and sell rips below the Flip.
Timing Mechanism
I employ the DSS cycle on two distinct time frames: the 15-minute (15M) and 1-hour (1H), utilizing both cycles in tandem to determine potential 'action points’ for buying or selling.
When both the 15M and 1H cycles are oversold (cycle low), the probabilities favor the upside. Conversely, when both cycles are overbought (cycle high), the probabilities favor the downside.
The same logic applies to any timeframe, such as the 4-hour and daily charts. Confluence between timeframes increases the probability of identifying a turning point.
You can make slight modifications to the DSS settings to improve the signal. This involves changing the K source from close to low when the market is in a bullish trend and from close to high when the market is in a bearish trend. By changing these settings, the price nearly always tests the extremes, with cycle lows at 5 and cycle highs at 95, helping to better time entries and reduce ambiguity.
We never want to use cycles in isolation but rather in tandem with our Gamma levels to identify strong support and resistance zones where pivots are more likely to occur.
When structuring swing trades, it's advisable to prioritize major gamma levels for determining entry and exit points, as these are where to expect the highest likelihood of a pivot. The strength of a level can be determined by the notional gamma value, with higher notional gamma indicating stronger levels.
Additionally, identifying structure on your desired timeframe can help in structuring the trade and placing stops more effectively. This includes patterns such as upsloping or downsloping trendlines, flags, triangles, and others. Learn more about Chart Patterns.
Keep in mind that markets can remain overbought (cycle high) or oversold (cycle low) for extended periods. However, these conditions can be minimized by aligning with the trend and being more tactical if trading counter-trend.
Options Strategy & Strike Selection
This is ultimately a personal preference, as individuals vary in account size, risk tolerance, and trading styles.
Approaches can range from aggressive strategies, such as positioning with single options that are further out-of-the-money (OTM), to more conservative strategies, which involve positioning closer to the current market price or using debit spreads. For example, a Bull Call Spread which involves buying the at-the-money (ATM) strike and selling a strike further out-of-the-money.
For those seeking an income-generating strategy, credit spreads can be utilized, which generally offer high probability with lower risk/reward trade-offs.
The level of implied volatility can sometimes help dictate the most beneficial options strategy. Utilizing the Volatility Risk Premium (VRP) helps determine any added advantage. This metric evaluates whether market participants expect higher or lower uncertainty in the future price of the asset.
VRP Premium: This indicates that implied volatility significantly exceeds realized volatility, suggesting that options may be overpriced. In such cases, it might be advantageous to sell volatility and/or structure swing trades via spreads to mitigate the impact of volatility crush if it occurs.
VRP Discount: This indicates that implied volatility is lower than realized volatility, implying that options are underpriced. In this scenario, there's no 'extra premium' available to collect as a volatility seller. It's generally more favorable to structure trades that benefit from increased volatility.
VRP Neutral: This indicates that implied volatility aligns more or less with realized volatility. In this scenario, there's no significant advantage in terms of short volatility or long volatility strategies.
Expiration Date
Based on back-testing, trades on the SPX 1-hour (1H) time frame lasts for an average duration of 5 days. If trading debits, it's generally advisable to allow for some extra time when selecting expiration dates, so using a buffer of 5 to 14 days may be more suitable.
You can also utilize the Average True Range (ATR) and the 5-Day Implied Move to aid in projecting the amount of time it may take for the price to hit a specific target.
Average True Range (ATR): is a technical metric used to measure the volatility of an asset by calculating the average of its price range over a specified period. It helps participants gauge potential price fluctuations, set stop-loss levels, and estimate the time it may take to reach a profit target.
For example, if the Average True Range (ATR) is 2.5, and you enter a trade at SPY 440 with a 10-point target set at 450, it would theoretically take 4.2 days (10/2.5) to reach the target if the price moved in a straight line. However, such a linear move is rare in reality. Therefore, it's advisable to factor in a buffer when determining your expiration date for the trade.
5-Day Implied Move: The 5-Day Implied Move represents the expected one standard deviation range for the week (5 trading days). It is updated at the beginning of each trading week and is calculated based on Friday’s closing price from the previous week. You can calculate this for any time horizon using the following formula.
To calculate the 14-day move with annualized volatility:
For an annualized volatility of 20%:
The expected move in 14 days is ±4.7%.
Stop Loss & Managing Risk
We recommend employing our same methodology for position sizing, Risk & Effective Position Sizing.
Keep in mind that every situation and options strategy is different in terms of stop losses and how to manage trades that have gone wrong.
In short, long options or long vertical spreads are risk-defined strategies, with the stop loss technically built into the trade. However, traders often use a 50% stop on premium or a technical stop. My preferred approach is to use a technical stop, whether it's a break of a support/resistance zone or a structural level.
As for credit spreads, a common stop loss is 2/3x premium, although many swing traders prefer to roll rather than stop if the trade thesis remains valid. Sometimes, the timing is off.
Once more, every situation is different, and individuals vary in risk tolerance and account size. Therefore, it's up to you to determine the approach that suits your specific circumstances.
Trade Frequency: Finding the Right Balance
The number of swing trades you make per month can vary widely depending on your trading strategy, market conditions, and personal preferences. Typically, successful swing traders focus on quality over quantity, aiming for a handful of well-chosen trades per month rather than a high volume. This approach emphasizes patience, both in waiting for the ideal setup and in allowing the trade to develop fully. By concentrating on fewer, more promising trades, you can better manage risk and increase your chances of achieving favorable outcomes. The goal is to strike a balance between seizing profitable opportunities and avoiding overtrading (this is not day trading), which can lead to unnecessary losses and increased stress.
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