Mechanical Trading Systems: Pairing Trader Psychology with Technical Analysis

SWING TRADING WITH 2-HOUR BARS

Various market participants define swing trading in different ways. For the sake of clarity and consistency we will define swing trading as trades typically held for more than 1 and less than 10 trading days. The intermediate-term mean reversion systems highlighted in Chapter 4 had an average duration of 8 to 20 trading days. Therefore, swing trades bridge the gap between intermediate-term and day trading systems. Some market participants use the term swing trading to designate nondirectionally biased mean reversion strategies; because I define the term based on this purely time-driven criteria, we will examine trend-following, trend-following mean reversion, and nondirectionally biased mean reversion swing trading systems.

Trend-Following Swing Trading: Channel Breakout

To examine a typical trend-following swing trading system, we will modify the channel breakout system used in Chapter 3 by changing the entry criteria from 20- to 15-day highs or lows and reducing the exit condition to the violation of 8-day highs or lows. This shifts our original system from a stop and reverse to one that allows for neutrality during sideways market action. In addition, to ensure that these trades remain “short term” in duration, we have added a time-driven exit criteria that will be triggered on trades held beyond 7.5 days. (See Chapter 4, “Time-Driven Exit Filters,” for the programming code.)

Because we only trade T-bonds during their day session, whereas the euro/U.S. ...