My Swing Trading System: Why it’s better than yours
My swing trading system is better than yours. I know that for a fact.
Do I really mean that?
Hear me out….
My swing trading system came about from years of work… decades actually. Years of study. I paid a ton in tuition money for it. Not at a school, but in losses. Lots of losses. I certainly figured out what didn’t work for me by some pretty horrific mistakes. Along the way I learned what worked for me.
That’s my point.
My system is better than yours because it’s mine.
Your system won’t work for me. It works for you (hopefully). If I took your system and traded with it, I would invariably want to change a few things. Maybe a few tweaks here and there. Just that alone can make or break a system.
What works for you, will not work for me. What works for me, will not work for you.
I’ve tried other trading methods and some worked, some didn’t. The ones that worked also didn’t work all the time, in all markets either. The ones that worked ended up not working because I was uncomfortable with their style. I just had to “F” with them and that in itself was enough to render them losing systems.
Invariably, I ended up screwing things up. You might have had the same experience? I know that overall, at least 90% of traders fail. That’s a fact. They wash out and go away with their tails between their legs.
Well, I’m still standing. But I am by no means an expert. I know enough to know that I hardly know anything when it comes to trading. But I’m still trading, and am consistently taking money out of the market.
Things have worked for me because I learned what makes me tick. I learned what I’m comfortable with. I know what fits my lifestyle and personality. That’s why my trading systems and methods are better….FOR ME. Your trading system is better….FOR YOU.
There is always room to learn and grow though, so I put together this page to highlight what has worked for me, what hasn’t, and what I think is important when developing a trading system.
The Chase: Looking for the Holy Grail
I’ve used all kinds of trading methods and trading systems over the years.
I once had a system that would focus on trading stocks with breakouts. I’d setup my resistance lines, watching potential candidates to breakout on strong volume. It had some promise, but invariably the losing trades added up, not enough to make up for the few spectacular winners.
Then I modified my breakout strategy a bit…why don’t I wait for the classic pullback that happens after a breakout and buy when it retraces back to the breakout point? Essentially the same thing, it worked sometimes, other times it didn’t. So I moved on…
I got into buying penny stocks in 1998 and 1999. I thought I was a genius then. I’d buy penny stocks that would soar, 100-200%…in a day. I increased my trading stack quite significantly. Things were great.
I had zero risk management though. Probably didn’t need much of one back then because everything was going high and continuing to go higher. When the dot com crash occurred, I continued to hop in and out of stocks.
What a mess that turned out to be. It turned out that these high-flying stocks were not bouncing back on pullbacks. I lost everything and blew out my account. I had zero risk management. I ended up holding stocks that accumulated significant losses and finally sold when it was way too late and after losing huge chunks at a time 50% on a trade, 20%, 80%. Stupid stuff.
I took a break, then licked my wounds and got back into trading, trying different strategies. None of them worked.
A small sampling includes options related strategies, trend following, systems on various indicators such as MACD, stochastics, RSI, Bollinger Bands, accumulation/distribution, etc. Had some marginal success, but overall, it was just blah.
I’ve had plenty of periods where I didn’t have a trading system or trading method at all. I simply hopped onto the next bright, shiny object and made my justifications AFTER I was on-board a stock.
I finally realized I had to take a break and change things up. I spend a ton of time reading. I spent lots of time soul-searching.
Why was I a loser?
Over time I realized that I needed a system that matched my personality but also saved me from myself!
What went wrong:
I mentioned earlier that I read a lot of books on trading strategies, technical trading patterns, trading psychology, risk management, etc. When I did that, I realized that there are tons of different trading systems out there, and people are using them with great success…or they wouldn’t exist any longer. These systems are so different, and in many cases complete opposites! Yet they seem to work for those traders.
I realized thought that just as importantly, these systems seemed to match a trader’s outlook, their personality, their philosophy of trading. That was common across the board.
I needed to figure out what went wrong for me in the past. To actually learn from my sh*ty mistakes and try to come up with something that worked for me.
I took a good hard look at my past actions, my personality and found some common traits that caused my downfall as a trader.
I have a FOMO problem – (Fear Of Missing Out):
That term is quite common today, but back when I was blowing myself up by jumping on what I hoped was the next rocket ship investment, I was simply indulging this trait and it proved costly. When I saw a potential trade, I just had to be in it. “What if this thing just takes off and I’m left standing on the sidelines?” That was a common thought.
Many times I’d jump on something way too late, at the end of a move. Overall, this personality trait has proven to be very costly to me. I just had to be invested in something. I had to do something. I just couldn’t have cash sitting idling by on the sidelines waiting for the next opportunity. I felt like I was missing out. I’d see stocks move higher and wish I was on them. I’d frantically search for the next trade and of course, I’d quickly find it too. No problems there. Most of those trades were losers.
I have a need to be right… a perfectionist trait:
There are trading systems out there that might lose money on 99 trades and make money on 1 trade out of a 100. Some of those systems are quite profitable. This type of system would have tons trades with very, very small losses, but a few very, very big winners. Here is a system that has a win percentage of 1% and it can work! It just doesn’t work for me. I have a personality that strives to have things go right as much as possible.
With trading though, losses are part of the game. They happen. A trading system that has a few big winners standing above a sea of mini losses just isn’t for me. I’ve got to have a system that has a winning percentage that is at least greater than 50% and probably closer to 60
I hate to admit that I am wrong:
Growing up, this was a problem, not just as it relates to trading. Deep down inside, I had a need to want to be right about things. You are wrong, I am right. Black and white. What an annoying trait. I’ve come to understand that this wasn’t healthy and today I am quite tolerant of everyone’s views. Matter of fact, I embrace differences and nuance. Grey is cool.
But deep down when it comes to trading, I still have this urge to be right with my trades. That is why I would hold onto a stock and not sell it, when clearly, I was wrong! Basically, my trading methods in the past were pretty much all focused on entries. I never really thought to myself before getting into a trade, where should I set my stop loss? How much am I willing to lose? I’d just focus on the potential profit and how this trade was the right thing to do, with no potential that I could possibly be wrong. It is an ego thing, not wanting to admit that I was wrong.
This trait caused me to sell my winners and hang onto my losers. This is the exact opposite of what successful traders do. You have to cut your losses short and hold onto the winners.
If I was to be successful, I needed a system that takes care of this character trait!
I become “married” to a trade
This happened to me a lot. After I would enter a trade, I would start to dig further into a company’s fundamentals. Here I was, entering a trade based pretty entirely on technical analysis, but then starting to research the fundamentals. Why? I’m naturally curious, so I wanted to learn more about a company after I was on-board.
What would happen is that I would start to become emotionally invested, saying to myself, “This company has a great technology!”, or “Wait until this potentially upcoming news occurs. It is going to rocket after that!”, or “I think the earnings are going to come in higher than expected. Maybe I should hold on until earnings come out.”
Next thing you know, I’m getting 10k’s in the mail and I’m analyzing balance sheet and cash flow statements! Horrible! I thought I was a trader, not an investor!
I obsessively watch price action throughout the day
One of the best things about swing trading, as opposed to day trading, is that you have a tad bit of a longer time horizon. Once you are in a trade, you certainly don’t need to watch every tick. You don’t need to look at the bid/ask sizes. You don’t need to look at Level II quotes. You don’t need to look at 1 minute charts.
Yet I would do all of these things. I guess I wanted the trades to work out so badly that I wanted to watch everything unfold in real-time.
My emotions would rise and fall with each tick. This would then influence whether I wanted to continue to hold or get out.
I think the grass is greener on the other side of the fence.
This is a nice way to quickly destroy your trading account. I’d always be looking for the next home run trade. Sometimes I might be in a trade that was working out perfectly, and then I would see another bright, shiny object and get the feeling that I HAD to be in on that trade! If I didn’t have cash available on the sidelines to chase something, I would sell a trade (even if that trade had great promise and was working out), and jump on the shiny trade that caught my eye.
Many times, this trade didn’t even fit into my trading strategy! It was just something that I simply thought had amazing promise to move up. Almost always, I was wrong. Most of the time when I did this, the stock already had a big move up, and I’d get in at the peak and ride it down into oblivion.
Then, to add to the injury I had done to myself, I would watch as the trade I HAD been in before (and had aligned with my trading strategy) climb higher.
The Solution: Coming up with a trading plan that fit my personality (and also limited it)
So you can see I got some issues, right?! Maybe some of them ring true to you as well?
Can you can think of how your personality traits/flaws have limited your success?
I realized two things:
- I had to find a trading system that matched my personality.
- The system had to limit the parts of my personality that were causing me to make flawed decisions.
Here is what I ended up coming up with:
- I decided that I would only swing trade positive reversals (reversal patterns that move higher). – This takes away some of my FOMO emotions. Here, I would not be chasing a stock moving higher, but one that has declined or is declining. Most of the time with this method, I am buying a stock in general uptrend, which feels good to me, but at a bargain
- When entering a trade, I immediately set a stop loss: This is a rule I’ve set for myself that has helped me the most. If it hits the stop loss, I’m out. This takes away my need to try to justify that I’m right. Clearly, when I enter a trade, I believe it will moving higher. When I determine where to enter my stop loss, I set it at a point if the price moves to that point, support was broken and clearly I was wrong. I am not going to prove I was right and telling myself it might turn around after going lower. I was wrong…that’s it. This also helps take away my urge to watch every tick and worry because I know I am protected with that stop loss.
- When entering a trade, I determine my exit (potential profit). If the trade starts to work out, and reaches the point where I realistically feel the reversal move will go and then stall and not move higher, I get out. Usually the max profit is about 10% and on average about 5-6%. Time is money as they say, and in most of the patterns I trade, I notice that about these percentages hold true. Very rarely do stocks continue to go straight up. They pause and move sideways, or go down. This has helped with my issue related to FOMO. In the past, I would hang onto a trade that already had a great move with a percentage paper profit that was at or above average. You know what would happen next? It would go down. Sometimes back to my entry point. Sometimes it would turn into a loss. In those situations, again I was letting my personality get the best of me. Now, when I have a trade reach my profit goals, I move up my stop loss to protect my profits. If it moves higher, great. If it goes down…I’m out!
- I limit on my holding period to days or a max of 2 weeks, then sell and move on. The patterns I trade reverse fairly quickly. If the stock is languishing, the bounce I was expecting has clearly not occurred. Also, by limiting my holding period, I am removing one of my traits, which is to research myself to death to try and find reasons to hang on. Trying to find a reason to be “married” to a stock trade. This way I’m not turning from a swing trader to an investor.
- I only take trades from the universe of potential stocks that show up on my screens. This takes away my “grass is always greener” problem. When looking for trades to take, I only can look at those stocks that showed potential by making it through my stock screens. I only consider taking trades on the results of my screens for potential trade setups. I don’t look any longer at the top gainers of the day. I don’t look at the top losers of the day. I don’t try to trade the stocks that everyone is talking about on Stocktwits. I simply look at my screens. My screens are like guard rails, keeping me on the path towards success by only showing trade setups that FIT MY goals.
- My stock screens have been backtested to have a high win percentage. This helps with my need to be right all the time. I didn’t want to have a trading system where most of the time I had small losses and a few big gainers. To me, that would get me feeling down most of the time, even thought I would be making money. Having a higher win percentage, but with reduced potential for gains, better suits my personality. My screens have between 55% to 75% win rates. And my selections of only the “best” from those screens push my actual trade win percentage into the 80% range. The results from my screens are the only trading candidates I look at. I’d rather hit singles and doubles, rather than strike out most of the time swinging wildly for a few major home runs!
A Trading system that fit my lifestyle
I have three kids, a wife and a full-time job. Needless to say, I don’t have time to day trade or scalp ticks all day long.
My swing trades last a matter of a day, up to 2 weeks. I don’t have to watch every tick. My trades “time to breathe”. I can go about my day and not have to be tied to the computer, moving in and out of trades all day long. I might only be in no more than 3-4 swing trades at a time, so I also don’t have a ton to monitor and babysit
Also, since I’ve invested in the painstaking process of setting up my stock screens, I don’t have to devote hours every day to find potential swing trade candidates.
Here is a “day in the life” for how my trading system fits within my lifestyle:
I check my screen results after the market closes while I am at my full-time job. I make a few notes of the most promising trades.
The next morning, while at home before heading into work, I take about a half hour to more closely analyze the most promising candidates. I draw support and trendlines. I look at whether my pre-set indicators confirm whether I should buy. I look at where to set stop losses and the potential profit to figure out the best risk/reward candidates. I then have maybe 3-4 stocks to potentially enter that day. I normally end up picking only one trade to enter.
Then I head to work. From 9:30 to 10:00, I’m at my desk monitoring the action of the 3-4 candidates and take the trade of the one that is reacting the way I want and then enter my trade. I also am likely to be selling any prior holdings that reach my profit potential I had set, or get out of one that might have treaded water by moving sideways.
Then, I’m pretty much done for the day… until right before the market close at 4PM, where I look to see if there is anything else I should sell at a profit or loss.
This is the trading system that I have been following for years recently, and it works for me. It fits my personality. It fits my lifestyle. It simply works….FOR ME.
However, I do believe that even though, everyone has a different trading system, there are some major common traits that successful traders have. There are common traits that all trading systems have.
I believe all successful trading systems at least share the following traits:
- Limiting risk: From all of my research of successful traders, this is universal. It also seems to never get as much attention as it deserves but it is a must! Everyone wants to talk about entries. That’s sexy. But selling at a loss…that sucks. It’s a negative! You were wrong. You lost money. You are loser. But that’s the wrong mentality. The key is to try to limit your losses, not focus on the profits. The profits will take care of themselves.
- I used to sweep my losses under the rug. I didn’t want to look at them. I told myself it would turn around. I would buy more and lower my average cost, telling myself things would work out. This is the wrong mentality. Successful traders look at a trade as just one of thousands and thousands of trades that they will be making in the future. It’s not make or break. If you don’t limit your risk, you will fail. Period.
- Anticipated profit: Successful traders always think not only about how much they are going to risk, but their anticipated profit. This way you can determine the risk reward. How much are you risking as it relates to how much you can make.
- Limiting emotions and ego: You won’t win as a trader if you let your emotions get the best of you. Limit the emotions of greed and fear. This is easy to say, and obviously requires discipline and practice.
- There is a quote in “The Master Swing Trader“, p. 153: “The pain of losing money stands beside profit throughout the road to success.” Fact: you have to get used to losing money and accept it as a fact of trading.
- You can’t get emotional and euphoric when you have very successful trades either. Swing traders enter in a period of calm, and exit in a period of euphoria. This is the exact opposite of the crowd mentality. If you get caught up in the greed and fear of the crowd, you are guaranteed to be loser.
- Personality match: All successful traders end up fitting their trading style to their personality. Every system that a trader uses is uniquely their own. If you try to trade someone else’s system, even if it is successful for them, it is very likely it will not work for you. You will be naturally uncomfortable with at least some parts of it.
- Let’s say you are trading someone else’s system that has very, very few winners that are quite large, and large amounts of small losses. What if there is one trade that pops up, but you decide not to take the trade because you are uncomfortable with it. That could be the very trade that provides a majority of the gains for that one year! You’ve second guessed the system and short-circuited it By not following it to a T, because you are uncomfortable with it, you have now sacrificed a majority of an entire year’s gains by that one small change.
- Fit your lifestyle: A trading system has to fit with your lifestyle. If there is a mismatch, you will not be successful. Don’t try to day trade if you don’t have the time to do it. Take stock of the time you have available to research and trade. Match the system with your lifestyle.
I hope this post has at least one or two takeaways to help you with your trading system development. I’m not an expert. I realize that. But I’m also successful at trading (finally) because I figured out what works for me. I understand what makes me tick. I know what caused failures for me in the past and no longer sweep those mistakes under the rug, only to re-appear again.
What has worked for you? What did I miss that you think is important?
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The Greedy Goblin