Trade Risk's Swing Trading Framework

We spend a lot of time analyzing markets and sharing charts on YouTube and Twitter but rarely do we get a chance to discuss the decision-making that goes into our strategy and what gets us to actually place a trade.

Throughout this page, we’re going to dig into our discretionary trading process and outline our swing trading framework here at the Trade Risk.

It has evolved over the years, not drastically, but enough around the edges that makes me realize some of the following concepts may too evolve as time goes on.

Market Environment

We're huge believers in keeping a pulse on the health of the market environment to create context and make more informed trade decisions. One of our favorite tools to assist us in classifying market health is our own Market Health Dashboard (MHD). 

It measures 2 factors, Trend Momentum, on 2 different time-frames across the 3 major US averages:

  • S&P500 (SPY)
  • Nasdaq 100 (QQQ)
  • Russell 2000 (IWM)

We then add into the mix our own breadth cycles, which looks at a handful of different market internal indicators and outputs an easy-to-interpret: bearish, choppy, or bullish score.

All of this is 100% rules-based and calculated automatically. 

At a quick glance, it allows us to know very easily and reliably where we stand in markets.

Stock Selection & Scanning

When it comes to stock selection, there are two primary buckets trades fall into.

First, is a basket of highly liquid ETFs mostly comprising of the major indices, sectors, commodities, etc. Using both leveraged and non-leveraged ETFs, these are names that are always potentially in play for a possible trade setup.

The second group consists of individual stocks from our TR150 Leadership Watchlist and from scanning the market daily.

Check out our TC2000 scan store and choose from over 30 different price action scans and indicators 

Every weekend, we build a watch-list of leading stocks within top performing industries that are in healthy long-term uptrends showing high relative strength. At any given time, our qualified stocks list contains anywhere from 30 to 80 names in it depending on the market environment.

After the close each day we're also running scans to make sure we aren't missing any other stocks that meet our trade setup criteria.

Trade Setups & Price Action Analysis

At a high level, there are 3 basic patterns we trade.

  1. Breakouts
  2. Pullbacks
  3. Reversals

What is important to realize is that these are fundamental characteristics of price movement and at any given time there are thousands of breakouts, pullbacks, and reversals happening simultaneously across all kinds of different markets, time-frames, currencies, etc.

For that reason, we’re not interested in trading any old breakout, pullback, or reversal; rather, we are interested in trading them when they occur at very specific locations, after specific price formations, and ideally in our leading stocks discussed above.

Price, volume, and momentum are how we measure everything that we care about.

End of Day Trading

One thing that makes our strategy unique is that we use daily closing prices for all of our signals. That means we aren't buying stocks based on intraday movement, rather, we wait until the market closes at 4:00PM EST, and then we run through our watchlist and scans looking for stocks that meet our trade setup criteria. 

When we find a stock that fits our criteria we place buy stop orders for the market open the next morning to get involved in the trade. 

This approach has a number of benefits, all of which are outlined here, but very simply this allows us to focus on more reliable trade signals, reduce the noise in the market, and allow us to have a life outside of trading without babysitting markets all day.

Profit taking and stop losses do occur intraday (risk management trumps all), but because our stops and targets are always known ahead of time we can easily submit those orders to our broker and let the market do its thing.


Position Sizing [Risk Management]

Position sizing is such an important concept.

Entering a trade with too much size can overexpose your account to a single position creating unnecessary outsized risks. Underweighting trades can be equally as damaging from an opportunity cost, absolute return standpoint.

Having a meaningful size in each position while still being able to sleep easy at night is the target exposure we're looking for. Once again, we rely on an algorithm to handle this for us.

The position size calculator we use blends multiple risk thresholds such as fixed fractional sizing based on the overall portfolio, stop loss, volatility, stock/ETF type, and measures that up against the individual traders risk tolerance to determine the precise amount of shares to purchase.

We write more about this here and the calculator is available for purchase here

Trade Management

Trade management is highly rules-based with very little discretion involved. We believe in scaling profits as a trade moves in our favor and continually trailing a stop as forward progress is made. 

We are big fans of using risk multiples and assigning profit targets as a function of the outstanding risk in a trade. We incorporate market structure with r-multiples to get a slightly more logical level to place our profit targets.  We typically scale out of positions in halves or thirds. 

For tactical trades, our management style is much more aggressive locking in gains and protecting outstanding profits versus core positions which are given more room to work and therefore achieve larger sized winners.

Putting It Altogether - Swing Trading Framework

our swing trading framework - image of quotebox 2

Roughly 85% of this process is entirely automated and systematic given the tools, scans, and rules we've developed over the years, leaving us just enough room to mix in our creativity and market experience. 

Trade setups get all of the talk and mention across social media and inquiring traders, but I would consider that one of the least important factors out of the entire framework above. Knowing when to be involved, and with how much size (exposure) is far more important from my experience.

There are more details still missing here, but hopefully this gives you some good insight into our swing trading process here at The Trade Risk.

In 2019 we made the final leap and transitioned to fully automated trading systems. To learn more, check out the following link: