Swing Trading on currency market part 1

What is swing trading? How «swing trading» differs from «momentum trading»? Actually, there are many approaches to swing trading, but I will express my point of view on the subject.

Swing trading is trading on intervals more than 1-3 days, some traders may call it «long term» or «medium term», but in fact, good swing trade can last no more than 4-5 days. Swing trades are usually level-based trades. For example, if you trade momentum, you can capture short-term overbought or oversold condition of the market (imbalance) and trade-off scenario of inventory correction.

If you trade momentum, your trade will look like that:

You see, that typically you will buy high to sell higher. But in this case you act like a sniper, wait for perfect timing for your entry, then aggressively go with the market, capture profit and exit. Things are different with swing trading. For momentum trader it’s natural to exit pretty quickly (duration 3-4 hours for intraday trade) because his price is not relatively very good – momentum trader is unable to survive pullbacks, rotations and other activity of the market, before it reaches the target. That’s why momentum trader will tend to quickly reduce his risks, minimize stop losses or set them to breakeven. Swing trader expects to get good price while his timing may not be ideal. If you expect to get good price, market can revisit your entry several times, rotate above your entry (if you go long), go sideways, and only after 2-3 days of sideways action price can break out from a range in the direction of your position (or may not break out)

Typical swing trade looks like that:

I basically trade 2 types of swing trades – «rejection trades» and «hot spot trades»

How do they look like?

In this post I will talk about "rejection trades".

Briefly, rejection is a reversal. It’s that simple. But there’s one small nuance. Rejection level is not a «support» or «resistance» level. Actually, there are no support and resistance levels – there are only areas of support and resistance. And they are usually located where majority of traders don’t seek them.

Important principle:

Before ever considering fading correctional move, you should see signs of support/resistance before. Sun Tzu had said: «Every battle is won before it’s ever fought»

The same is in trading. Every reversal is made before it’s occurred. Weird, huh?

Reversal is just a paradigm shift in heads of market participants. Before reversal, market must have strong imbalance between demand and supply, otherwise no power can drive the market against existing trend (even correctional)

So, to decide whether to join a trend or not, you should see signs of big money buyer (seller). As you know, institutional buyer will tend to accumulate, to slowly build his position. More often than not those guys are not speculators in conventional way – they accumulate position by given price, then use purchased asset in business outside the market.

So, if you see that market tends to show you very well traded levels in the center of the day and poorly traded levels on the extremes of the day, it can be a sign of accumulation if this process goes long enough.

Look at the chart of AUDUSD – you have seen signs of big buyer accumulating long here – look how price is leaning to the area 0.9440. How do you think – why market shows strange consensus around this level?

Also, you expect to see «neutral» or «normal» days as the process of accumulation goes on. Neutral day is day with very low tempo and aggressiveness – it closes near its open. Normal day is more aggressive day, yet it also closes near its open. These days also help you find accumulation areas on the chart

And there are other clues that I can’t describe here, because in this case post would become very massive. I call areas described above «real support areas». Why «real support»? Because those who join the market from any lines can’t really support the market – they are short term players and gamblers by their nature. Will gambler support any market? He is careless and he will exit first if something goes wrong.

Guess what I’m trying to tell you?

If you want to get good price and capture a reversal of correctional trend, you should seen signs of real support. Real support creates conditions for a reversal if market goes against big buyer (remember –to reverse the market, there should be supply/demand imbalance). Reversal itself occurs after paradigm shift, when it becomes clear for most short sellers that they were biased and go in the wrong direction.

Compare two situations. I specially applied market profile for those charts to show you the concept. On the first chart there are not enough real support clues - market goes back and forth in continuous search for information, on the second chart things are different – this chart is much more «managed» and probably driven by strong money buyer.

So, not surprisingly, price reverses below offering several good opportunities for a swing trader:

Price Action Basics VII

Initiative, liquidation and responsive breaks Hi, fellow traders, let’s continue our studies in price action. Interpreting charts can be not very complicated, and I would say – good setups look pretty simple, but in most cases this simplicity requires astute eye and some practice.

Many of you are familiar with concepts of «overbought» and «oversold» market. Conventionally, if price is going up and momentum is slowing down, we see signs of overbought market, and, the opposite – when price is going down and momentum is slowing down, we see oversold market.

But is it fair for every market condition?

Market is a huge pie, where interests of different traders from different timeframes are crossing over. The overbought/oversold situation above occurs only when market is dominated by short-term traders. But let’s first get familiar with concept of domination. What doest it mean, that market is dominated by short-term traders? It does not mean that nobody is there except short-term traders, it means that they are the driving force for the market.

By the way, short-term trader does not necessarily mean lack of money on deposit. It only means that horizon of a trader is relatively small. In most cases, it’s short term traders who are responsible for initiative and liquidation breaks.

If you we see movement that is going to be highly volatile and starting from inside of the trading range, it’s probably a «cascading effect» - something that is created by «fear of missing out» - many traders are chasing this movement and will lead to fast auction, raising prices higher and higher. In auction market theory it’s called "initiative break", it means that something is happening very quickly, with significant expansion in volatility, and maybe – volumes. But volumes can be not interpreted easily in this case. When volume is increasing (or decreasing) inside of the trading range, this information can be misleading, because there are too many types of traders participating inside of the trading range – from algos to scalpers, and increased volume can be a result of those guys’ overtrading

What about "liquidation break"? This is the opposite to "initiative break". It occurs when traders who have been involved in the action (during initiative break) are closing their positions. Usually, volatility is also increasing, traders are scared due to some news announcement or they simply put their stops below similar levels again causing cascading effect. Really, there’s nothing new under the moon – traders often act like a herd, and they rarely try to find their own particular niche and instead do what is comfortable and conventional – say, buying on the moving market and selling on the falling market.

Now, what if market makes quick break from outside of the range of the day? It is called «responsive break». More often than not, responsive breaks represent activity of other timeframe traders who are building their positions using high prices (of course, short positions). We should take into consideration that other timeframe traders are not too urgent – they don’t want to push price down here and now, they understand that market has opportunity to go down in medium term time perspective and they want to be in this movement, but they are interested to accumulate inventory before the rally, that’s why they are acting upon a good price, but not expecting to get good timing for their trades.

So, responsive activity can be the sign of market that will at least hold near current prices for a while.

Why in the world do we need to know this? If you know market structure, if you know who is involved and what happened in the recent past, it would give you better understanding of possible opportunity (or it's absence)

For example, if you've seen that market has liquidated, and before that it has auctioned higher with initiative break, you can make conclusion that short-term traders were in, now they are out. Market has become more neutral and nothing really happens - market needs more information to generate movenent to whatever side.

Or if you see several responsive breaks to the downside, it can be possible indication of big player accumulating position. Does it mean that price will necessarily go in his favor? No, even big players are losing money, but if you see any setup confirming short position, your view may be supported by those attempts of responsive activity.

Price Action Basics VI

Liquidity – what trader needs to know? Hi everybody! Let’s continue our study in price action and market logic. How do you think, what is the main goal of the marketplace? Some would say – market brings together supply and demand, and that would be right answer, but it would be too abstract. The goal of the marketplace is not just to gather buyers and sellers and give them opportunity to trade, but to facilitate trading. What does it mean – to facilitate? It means that big market participants that mostly benefit from liquidity, will be interested in active trading from all types of traders. The more traders are involved, the better execution large speculator or commercial trader will have. Exchanges, for example, hire special companies, that are called «market makers» and pay them salary for keeping two-sided quotes – therefore every investor will be sure that he will be able to get a fill for his position. But even though, two-sided liquidity providers are unable to keep market in a balanced state when there is some aggressiveness in the market and liquidity is not very high.

Trends often occur when there are not enough traders involved and market has to advertise more and more to attract liquidity. So, big market participants are often not interested in trends, they would rather prefer balanced state of market to have opportunity to slowly accumulate their positions. It’s tough job – to accumulate position on the rising market.

But we as traders are interested in trends, aren’t we? Of course, idea of a trend is different for daytrader and for position trader. Let’s now talk about short-term perspective.

See the picture below – how do you think, where liquidity can come to the market, in point A, B or C?

Obviously, points A and B are extremes of the bracket, and there are always traders that will try to fade extremes, as well as traders that will try to play breakouts. In point «C» there are not too many traders involved – they don’t know how to calculate the risk and where to place their stops, that’s why I can call this area «no mans’ land» and areas at the extremes «hot spots of liquidity»

If market is trading without significant support from other timeframes, it will tend to go from one extreme to another, yet it’s tough to calculate risk at the extremes, because you don’t know who will win in short-term time perspective – buyers and sellers, buyers can create a breakout, collect stops of sellers, then market will go lower, or sellers can drive the market down and buyers will liquidate. So, when the crowd is there, don’t expect that price action will be predictable and smooth.

In my own trading, if I see that market conditions are balanced, I rather try to work near «no man’s lands» in the direction to «hot spots» where I cover my positions. Key here is aggressiveness – if market is aggressive and volatile and liquidity is not enough, it will tend to reach extremes – market needs liquidity, after all it is an auction which goal is to facilitate trading. Liquidity is located near hot spots – I exit there, I don’t know who will win and I even don’t want to predict it.

Price action Basics V

«Thing that hasn’t happened is sometimes more important in the market than thing that has happened»

I want to start this thread with this strange sentence. We will talk about trading logic. How do you make decisions? Do you look for signs of buyer and seller and act accordingly?

Think about simple thing – price action itself (trend, movement) will not allow you to benefit from that. Some movements are continued, some are reversed. It depends on current market conditions, but probability of success will be close to 50/50 if you simply follow price action (substract spreads and rapid volatility spikes and you will get perfect strategy for failure).

So, what works?

If you dig deeper than simply following price action, you will understand that supply and demand will drive the market. But supply can be short-term, then transform into demand and vice versa. So, you have to rely on professional supply and professional demand and be able to distinguish it between other fluctuations. All that we learn here is designed for that. Professional demand (or supply) in most cases is ongoing demand. But are we naive enough to think, that professional buyer will uncover his actions for you in easy identifiable and straightforward way? No, they don’t do that!

There are numerous attempts to capture signs of professional activity using volumes. Some traders think that if they have volumes, they have real information. Poor guys!

Volumes are also misleading. So, one can not be successful in trying to capture big buyer from the market… if he thinks in conventional way.

Market tells you a story and you should understand this story, combining nuances and clues (even number of volumes if you like) in the whole picture.

Here are several examples:

1. Market breaks out from a level and keeps level above. You see strange passive behavior of sellers – market shows you levels with very low volatility and holds there twice! If sellers were interested in this market, they would probably responded immediately. But you see no participation – something wrong with the supply is going on here.

Therefore you can anticipate that big guys are buyers! They’ve collected all supply below and no one wants to go against them at least for a while.

Not surprisingly price breaks out to the upside again

2. There’s neutral day after the breakout. If there were short-term traders who have made this breakout, they would liquidate pretty soon. But nothing happens – nothing at all! All day price goes back and forth with very low tempo. It means that probably those buyers were big (institutional) buyers

Every time you analyze the market, you make narrative. Be sure that your narrative is reasonable and relies on solid market logics

There are some important principles: 1. Insitutional buyers will sell on the upside breakout (not downside)

2. Low volatility after high volatility (directional breakout) shows lack of participation. The less liquidity (participation) we have near current levels, the more odds that market will auction higher.

Is it complex?

Yes, it is. But this is mindset that requires from you some disbelief, some critical view, some commitment to dig deeper and see what is hidden. That what trading is about.

Price Action Basics IV

Technical analysis tells us that "price reflects everything".

Is it right or not?

In previous post I've shown moving average indicator as an example of how one can use price-value approach in trading.

But this is just example, in reality, simple MA can't show you where value is.

Let's say, MA calculates 35 closing prices (35 parameter). Do you think that every price is equal here? Area located at higher prices is more significant for the market because it attracts more volumes (aggresiveness). So in fact weight of higher prices in calculation formula should be increased if we want to know where value is.

What am I trying to say?

Price can't reflect everything because not every price level is equally important for the market.

The missing piece is time and volume

(we don't have volumes on Forex - tick volumes is not what we need, so we can make conclusions about volumes from price action - was it aggressive or not?)

If you will refer to price as to advertising mechanism, it would be much easier to understand what's going on on the market.

I will quote great trader and coach, Jim Dalton, that teaches his students in approach of auction market principles:

Price advertises opportunity

Time regulates this opportunity

Volume measures success or failure of this opportunity

Price Action Basics III

As you might notice, I'm not suggesting to simply FOLLOW PRICE, but I suggest you to rely on MARKET LOGICS.

Why not to simply follow price action?

Price is simply the advertising mechanism and in most cases it can be misleading. "Should you accept this breakout", "should you fade this market" and so on and so forth. Price itself will not give you clues for that. You have to analyse fragile equilibrium between price and value to get answers on these questions.

What is Value?

It can be called area of aсceptance - area that market will more likely revisit or stay near that area for some time. Trading markets, you should rely on fundamental market principles.

And of of them claims: "The goal of the marketplace is to faciliate trading"

If you think about this principle, you will understand that market needs liquidity to facilitate trading. By "liquidity" I don't mean single buyer that steps in and kicks the price.

By liquidity I mean plenty of players with different perspectives, participating near given price level. If you have that pluralism in opinions, you have value area.

If liquidity is not enough, market auctions higher or lower to find it. Guess, how it attracts liquidity? Of course, it offers higher or lower price - nothing is new. That's how market auction works.

There are 2 basic types of price action if we look at it from "price-value" perspective.

I will use the simpliest way to vizualize value on market - moving average. Of course, it's not that simple in reality, but it would be enough to show you how it works.

1. Value is leading, price is following.

For example, it occurs when value is lower. Market accepts lower prices and rejects higher prices, yet it has scanned higher prices for liquidity.

You might notice that value is going sideways.

In this case market has no reasons to immediately leave this value area. You may expect some rotation before something happens.

2. Price is leading, value is following In this case you may notice, that price runs away from value, there's often a gap between price and value, and this is an indication of strong imbalance - sellers are in control and it's better to trade in sync with them.

PriceAction Basics II

Strong holders vs weak holders

Ok, now if we have distinguished weak holders from strong holders. And what we really have to do - we want to know, at least to assume what professional players are doing. By professional players I mean dealers or institutions that have to consistently deal with big volumes and give their clients at least average good fills. Institutional activity When we are talking about institutional activity, we are talking about strong holders. That guys have almost unlimited buying power at their disposal, but it doesn't mean that they want take money from you, they usually have large order from their clients. It not always means that they want to purchase from weak holder, squeeze them and hunt for their stops. They just want to accumulate position not squeezing price against themselves. First of all, if you look at this chart, how do think, where (on what prices) institutional player was buying (if he was buying at all here)?

Expected answer is that they were buying at lower level. But think about their volumes. They are big enough, and they simply would not have enough liquidity to build a position there. They usually have to accumulate - to buy several times, to absorb somebody's sell orders. Otherwise they will not have enough liquidity and make prices grow immediately So, their buying will be distributed within whole trading range:

And the first clue of institutional activity is acummulation on moving market (rising or falling market). They don't have enough order flow going down to absorb, so they have to squeeze prices a bit, but nevertheless they have good average price, not the worst of the period. It's a wave-like process. It ends with a breakout