Swing Trading

Defining Target for Risk Reward: Maybe you shouldn’t?

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The trade plan is broken up into parts. We have an objective and consistent entry, stop, and exit plan. Here I will be talking about the exit plan and setting targets that will give you a particular risk/reward ratio. There are no absolutes when it comes to what risk/reward you should be aiming for, a lot has to do with how you handle risk and loss and your overall understanding of markets.

Defining the stop (risk) is relatively easy compared to defining the target (reward). Mostly you need a clean set of statistics on an objective method. This will give you an average distance that the swing will run in relation to your method. The reward part of the equation is a function of how far your stop is to your entry.

There is no one-size-fits-all when it comes to trading. For many, it may be best not to set a target, but instead use something simple and objective like a moving average to exit the trade. This way, you get what the market gives you while incorporating consistency and objectivity into your exit plan. Keep it simple, objective, and consistent, and learn as you go. In the video, I make something up on the spot that may give you some ideas. I use a 20ema as a profit stop only after the price has made a new high. It’s simple, principle-based, and it’s objective.

No matter what your method, knowing where you are in the swing cycle will help in defining entry, stop, and target, and this will directly influence the risk/reward ratio.

What Is an Expanding Swing?

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Markets move in contraction/expansion. Small swings can be thought of as a form of contraction and the bigger swing is a form of expansion. An Expanded Swing is simply a reaction leg that is bigger than the previous reaction leg or legs. Its minor swings growing up to be major swings.

This represents a change in behavior that often causes confusion among the shorts and the longs. The shorts are fearful cause the market is now backing up on them and the longs are fearful cause they see a market now turning up and getting away from them. This confusion creates an opportunity for those that are sitting back with a plan.

To see this price action on a chart, it helps to have some simple and objective definitions for mapping the market and I show this in the video. First, we use market structure to read the market, and then we use a trading structure (trade plan) to structure the actual trade where we manage risk.

Review: Did You Make a Clear Plan? Did You Follow That Plan?

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We can break up the review section of the trading into several distinct sections.

1. Review for discipline and personal insight
2. Review for performance (statistics)
3. Review for market insight
4. Review for method development

I’m going to do the first section “Review For Discipline”. We can keep this simple and ask 2 questions.
1. Did you make a clear and objective plan?
2. Did you then do what you said you were going to do in the plan?

These questions demand honest, yes-or-no answers. They force you to confront your trading discipline head-on, without room for excuses or escape. If the answer is no that’s ok, just start over with the commitment to keep at it and don’t spend too much time on regrets. You might need to make your plan clearer or simply learn the discipline to stay with it. Keep in mind that this isn’t about whether you won or lost, it is about learning consistency and discipline.

Position Sizing: Learning to Lose

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Position sizing is one of the components of a trading plan, and it’s important to be just as disciplined and consistent with this as with all other parts of the plan. Position sizing is defining how much we will risk for each and our objective is to consistently get the most profit with the least amount of risk.

So, how much should you risk per trade? There is no one-size-fits-all answer, but to manage our risk consistently, we must establish simple, objective, and common-sense rules grounded in the realities of trading.

Let’s take a look at some of those realities

• As traders, we should expect to lose more often than win and must learn how to manage
losses effectively.
• At some point, we will face drawdowns with many consecutive losses.
• Successful trading results from a series of many trades and the compounding of gains,
not just from being right on one or a few trades.

In the video, I will show a simple guideline for calculating how much to risk per trade based on your risk tolerance over a series of trades and a drawdown number. I’m going to give you a default drawdown of 30 consecutive losses.

For example, if you have a $10,000 account and don’t want to lose more than 15% ($1,500) of your account in drawdowns, you would divide $1,500 by the default drawdown of 30 stops, which would give you $50 per trade (1/2% of the account per trade). This plan allows you to lose 30 times in a row while staying within your risk tolerance. This doesn’t mean you have to risk the entire $50 per trade; consider it a maximum amount.

If you are relatively new to trading or still fine-tuning your approach, I suggest trading very small amounts. Less than 1/4% of your account balance. Choose what feels comfortable and stick to it consistently. This allows you to make many trades while learning and not damage yourself. Be deliberate and create a plan to earn the right to size. For instance, require at least a small profit after two months and comfort with your method before incrementally increasing your risk per trade. Repeat this process every two months before increasing your size again.

It’s this kind of work that helps to balance your psychological mindset. You don’t get that from books about trading psychology, you get it from grounded and deliberate practice.

Use my position sizing calculations as guidelines and adjust accordingly. Once it is set, be consistent in what you do.

Do You Know What You Are Being Patient for?

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Patience in trading is the discipline of being with your restless energy when things aren’t happening the way you want them to. If we are to be patient, we must know what it is we are being patient for. That is part of what making a trade plan is all about.

I know I’m being patient for the conditions of my setup to line up. After that, I know I’m being patient for my planned entry to hit. Then I know being patient and waiting to either get stopped out or start to manage profits. There is no escape other than to make up some justification to break my discipline and try to make something happen or force the trade.

The analysis for this trade is simple and straightforward. FNV is going down according to the fixed cycle (amount of bars on the chart) I’m looking at, therefore I want to sell a pullback. The rest is just structuring an exact entry and stop along with management after I’m in the trade.

Understanding and practicing patience in trading is not just about waiting; it’s about disciplined waiting with a clear purpose and strategy. It’s a practice.

Context and Learning To Change With Change

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One of the hardest things for traders, or anyone for that matter, is to adapt to change. Mostly we get stuck when things change, which makes trading difficult since the very nature of markets is change. This is where the cliché ‘going with the flow’ originates, but simply understanding the cliché isn’t enough; we must internalize and practice it and get it in our bones.

In this post, I will outline a trade plan for RNG. This is a part of our ’30 Planned Trades’ series, where we plan every aspect of the trade ahead of time and then execute what we have planned.

One aspect of a trade plan is the method or setup. Setups don’t happen in a vacuum, there is a context that determines the meaning of the content. I’m going to approach context very simply here as the thing that decides if the market is going up or down.

I often read things about how I should follow the trend or go with the flow or don’t fight the market, but exactly what trend or flow should I follow? It’s too abstract, so I’m going to fix a cycle to follow and learn to let go and change when it changes.

In the video, I show the basics of a simple practice you can try, using a rolling 100-bar cycle to determine if we are looking for long setups, short setups, or in a transitional or neutral phase. I not only want to be precise and consistent in my Trade Plans, I want to be consistent in my methods.

By adhering to a fixed cycle and adapting to changes, I avoid the need to guess or predict market directions, maintaining balance in my approach. Think about this: If you charge your mind with the impossible task of predicting a market when markets are unpredictable, you will end up a nervous wreck and then wonder why your trading is so emotional.

I encourage you to try this practice. Since it keeps you from constantly looking to the left of the chart or at higher time frames for more information, it will likely push you out of your comfort zone into the unknown, which is a good start.

A Bad Trade Plan Is Better Than No Trade Plan

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Traders often talk about the need to be patient but to be patient, we must know what we are being patient for. That is why we have a trade plan and know ahead of time exactly where to enter, where to place a stop, where to exit, and how much size to put on.

In this post, I continue with our trade planning exercise of 30 planned trades by making a trade plan for LEN. Keep in mind that the exercise is all about learning consistency and discipline and not about the method or whether the trade wins or loses.

In the video, I speak of not being worried about losing all 30 trades in a row. It’s not that I have steel nerves, it’s that I have planned ahead of time for 30 losses with my position size.

Nothing Works, Either The Trader Works or Doesn’t Work

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In this post, I’ll be sharing a trade plan for IOT, demonstrating the importance of creating a consistent and structured approach to trading. A well-defined trade plan offers the only control a trader has in the ever-changing and unpredictable environment of the markets.

Initially, the process of developing a detailed trade plan may seem tedious. This is a natural resistance from our minds, which often shy away from structured approaches. However, the focus of this post is to encourage you to move beyond searching for the ‘perfect’ method and instead build a solid foundation of learning discipline and consistency.

Implementing a focused, consistent method is like a framework that you can learn from and even design new methods from within that framework. The key is to focus on being consistent in what we do.

In the accompanying video, I show the components and processes of a swing trade and how I incorporate these elements into my trading methods. Instead of thinking purely in terms of technical analysis, I encourage you to consider structuring your approach around the simple dynamics of buyers and sellers, to gauge who is in control at any given moment.

Trade Planning: Learning Through Consistency and Discipline

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I’m going to do a series of posts focused on trade planning, aiming to learn about consistency and discipline through practice. In this exercise, I will consistently plan, execute the planned trades, and document a total of 30 trades.

A trade plan is an essential tool for any trader. It consists of a method, trade management, position sizing, documentation, and review. The plan should clearly state, ahead of time, the specifics of each trade: where to enter, where to place the stop, how the trade will be managed, where to exit, and how to size the position. This level of accountability and responsibility offers a stark contrast to our usual approach, which often relies on ineffective emotional impulses for making trade decisions. It enables us to make informed choices instead.

In future posts, I will delve deeper into each aspect of the trading plan, discussing its importance and how to effectively implement it. However, it’s important to note that this exercise is not about the method, a setup, picking the right stocks, being right, winning, losing, or predicting markets. The focus here is not on the outcomes of the trades. It doesn’t matter if all the trades result in losses. The purpose is to learn about consistency and discipline through your own personal insight.

It’s through discipline and consistency that we begin to rewire old, ineffective habits and develop an effective mindset for trading in the markets. Consistently following a plan also provides a baseline that allows for meaningful comparison and learning. There is often resistance to this kind of structured approach. If you’re interested in adopting these guidelines, I encourage you to step into it as much as you’re ready for and make it your own.

This series is not meant for you to follow my trades or worry about my method or setup. It’s not important – my setups lose most of the time anyway. Use your own method; there are plenty out there. Focus on making it as simple and objective as possible. I also suggest starting out with simulation trading or using a very small size.

How and When to Buy a Deep Market Correction, Part II:

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In How and When To Buy a Deep Market Correction Part I. I showed a simple and objective balanced swing technique to find a Change in Behavior (CIB) in the deep pullback. In this lesson, we ground the teaching by doing step-by-step practice in stocks, currencies, futures, and Bitcoin. We finish with lining up live examples in some weekly stocks.
Practicing this simple technique will teach you to follow a deep pullback rather than trying to predict it. Make your own observations and discoveries about ways Change In Behavior can be applied.