Swing Trading Strategies That Work – Using Relative Strength

By on January 10, 2016

Good Example Of Swing Trading Strategies That Work

Good day traders, today I want to share with you some swing trading strategies that work in the real world. Several months ago,  I created a trading video about determining market strength using simple visual analysis and trend lines. In case you missed this video here is a link so that you can watch it.

The Video has been watched over 17,000 times in the last 45 days. This article and video that follows show you how to take trend line analysis to the next level.

When I started trading I wanted to learn the Holy Grail, I thought that the more complicated the strategy the higher the odds that It help me produce large profits. After some painful lessons i.e. losing my butt, I realized that difficulty of a particular trading method has very little to do with the level of profitability that method is likely to achieve.

One method that fits the criteria of swing trading strategies that work is relative strength, while it may sound fancy, it’s just a term for looking at several related markets and seeing which one is stronger and which one is weaker. The key is to make sure there is relationship between the markets.

For example related companies, currencies that trade closely like the Euro and British Pound, or Exchange traded funds that carry similar stocks, or different but related index contracts. What you want to find is two markets that follow each other very closely the majority of the time.

In this example I will use the two markets that most people are very familiar with, the two biggest indexes in the world. I will compare the S&P 500 with the Nasdaq 100 index. These two indexes typically have a correlation of above 85 percent, this means that they move in the same direction or follow each other the great majority of time. These two markets are a perfect example of two related markets.

Take a look at a chart of both the E-mini SP and the E-mini Nasdaq contract going back a few months.

swing trading strategies that work

E-mini SP sloping up about 55%

E-mini Nasdaq Sloping About 30%

E-mini Nasdaq sloping about 30%

You can tell by looking at these two graphs that the E-mini Nasdaq Futures Contract is the weaker one out of the two instruments. This gives me a good indication of the relative strength of E-mini SP Futures Contract as compared to the E-mini Nasdaq Futures Contract. Notice I’m not using any technical indicators other than my eyes and the OHLC bar chart to see the price action visually.

If I was to place a relative strength trade between these two contracts I would simply purchase the E-mini SP Contract and Sell the E-mini Nasdaq Futures Contract. Let’s see how this would work out in reality.

Take a look at both charts as they appear on the February 21, 2013. See for yourself how it would have worked out.

E-mini SP drops half as much as Nadaq

E-mini SP drops half as much as Nasdaq

E-mini Nasdaq falls twice as hard as SP Index

E-mini Nasdaq falls twice as hard as SP index

You can clearly see from these two charts that the E-mini Nasdaq is dropping about twice as hard as the E-mini SP Futures Contract. This is a great example of swing trading strategies that work in the real world. We simply combined visual trend analysis and took two markets that are related and compared the strength of one vs. the other.

You would simply go long the E-mini SP and you would short the E-mini Nasdaq contract at the exact same time. You can apply this same method to related stocks or other related markets. But make sure your positions are of equal size, this is very important.

Position Equalization

Note: there is a simple formula I will teach you in the coming weeks that determines how many shares or contracts to trade so that both the positions taken long and the position taken short are equalized to each other. Meaning you want the position that you are taking to the long side to be equal to the position you take to the downside. You cannot simply trade one contract long and one contract short in this situation because these two markets have contracts that are sized differently, so you have to equalize the position so that both contracts will be of equal weight.

You have to do each time you trade two separate positions in opposite directions, regardless of what stocks or other instruments you trade.

You always have to equalize your positions so that you are trading apples to apples and not apples to oranges. I will be doing a tutorial on position equalization in the upcoming weeks. I will also be writing several articles about swing trading strategies that work in the real world.

Many swing trading strategies look good on paper; I want to focus on only the best swing trading strategies that work consistently in real live market environment.

Wishing you all the best in your trading,
Roger Scott
Senior Trainer
Market Geeks

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