Swing Trading

I'm trying to work my way into a trading technique that's new to me. It's a swing-trading method, using cycles of 3 to 5 days, developed by a trader called George Douglass Taylor and published in 1950 in a somewhat inscrutable book called The Taylor Trading Technique It's a rewarding read, but it doesn't come easily.

It has also been extensively written about by Linda Bradford Raschke on her LBR Group website. Her articles "Swing Trading: Rules and Philosophy" and "Classical Swing Trading" are especially useful.

In a thumbnail, the theory has these rules:

• Begin searching for a long entry point two days after a swing low, or for a short entry two days after a swing high.
• Objective after entry is the high (for long) or low (for short) of the day previous day to the swing extreme.
• After entry, expect a zig-zag pattern, each presenting a higher-high-higher-low (for long) or lower-low-lower-high (for short).
• The end of the zig-zag typically is on the second day after the extreme. In any case, it is marked intra-day by a hook pointing opposite the prior trend.
• The overall cycle is typically five days:

1. Open long
2. Zig-Zag
3. Close, Open short
4. Zig-zag
5. Close, goto 1

• Two days in the cycle are potential day-trades, which must be fit into the SEC three-trade rule for accounts funded at less then $25,000.

I applied them to a trade yesterday on SPY, which showed a swing low of $104.58 on Feb. 5, with an objective of $109.03.

The swing high, which fell short of the objective, was set Feb. 11 at $108.25, with an objective of $106.11.

When SPY showed a slight downward hook near the end of trading yesterday, the swing high day, I bought an April put with a $112 strike (to give me some delta) for $6.42, and sold it this morning for $7.01, a profit of 9% before fees. Not bad for an overnight trade.

SPY shares were trading for $107.98 when I opened the trade and $106.88 when I closed, a decline of 1%.

And SPY is one of the less volatile of the high-volume exchange-traded funds. FXI, XHB, EEM, OIH and SLV all show greater swings, and therefore greater potential for short-term profits.

I'll continue exploring this technique, separately from the high-probability option trades that constitute the bulk of my work. My postings will be in the form of "2/12 Swing", with the current posting date.


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Topics:
S&P 500, SPDR, Spiders.