From the September 01, 2012 issue of Futures Magazine • Subscribe!

Trading channels for profit

When scalping, traders usually do not want to see a pullback. They often will allow one pullback lasting for a single bar, but if the pullback follows a strong signal bar against their trade, they usually will exit and not wait for their stops to get hit. Because the reward is small on scalp trades — usually about the size of the risk — traders should scalp only when they are highly confident that the trade will be successful. 

To be profitable as scalpers, they need a high probability of success on each trade when the reward is relatively small. Because the risk also is relatively small, most scalpers trade larger positions when they scalp than when they swing trade.

Swinging the market

Swing traders look for a profit that is at least twice as large as their risk. That usually means they will allow the market to pull back for several bars, even after the trade goes a considerable distance to their target.

Pure swing trading means that traders do not exit the position until there is a signal in the opposite direction. If one triggers, they will exit and then may reverse.

As the trend progresses, swing traders trail their protective stops. For example, in a bull trend, after the market pulls back and then makes a new high, many traders move their protective stops to just below the low of the most recent pullback. Eventually, the protective stops can be so far above their entry price that they still will have a sizable profit if they get stopped out.

During the spike (strong) phase of a trend, traders should trade only in the direction of the trend and look for any reason to enter. For example, in a bull spike, traders will buy at the market, at the close of every bull trend bar, below the low of the prior bar and on the close of any bear bar (expecting any attempt to reverse the trend to be brief and unsuccessful).

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