Taking popular Swing Trading Strategies, reviewing them, and backtesting them.

Swing Trading Strategies are popular because they require less time at the screen and a longer outlook as far as time is concerned.  Many people want to get involved and hold a position for a few weeks rather than a few days, hours or minutes.  The problem is that many do not know where to start and maybe should not even be solely Swing Trading in the first place.  Swing Trading Strategies can be used as a part of a portfolio that has a diversity in duration.  How do these strategies fare in a backtest?

Getting terminology straightened out is important to establishing some sort of a baseline of expectations.

What is Swing Trading?

Swing Trading involves holding positions between two days and two weeks, which allows for the ability to hold onto a position for market swings from high to low or low to high.  Swing Traders will weather or risk larger losses in proportion to larger potential profits.  Swing Trading practitioners will let positions breathe a bit, but will not exercise the patience that position traders and carry traders will take.

Swing Trading Strategies Chosen

• Swing Trading Strategy That Works  (That’s what it is called)
• Swing Trading 9/20 EMA Crossover
• The “So Easy It’s Ridiculous” Trading System

These are not the names I have chosen, but rather they are the names chosen by the system creators.  The trades will be made under the conditions that they publish and have all elements of human subjectivity removed from them (if they exist).  Swing Trading Strategies can and should like all strategies be automated.

Swing Trading Strategy #1:  Swing Trading Strategy That Works

This Strategy is courtesy of Trading Strategy Guides.  Below is an infographic that should have stuck to white text for the part that says “strategies that WORK”, but nobody’s perfect!

What is nice is that they layout the strategy for you in the infographic (illustrative of a short position entry and exit), encourage you to spread the word (whether this is a good idea in this context… you are about to find out!), and of course promote themselves because Infographics are viral promotional tools.  The time frame is specified as 4 Hours and three different currency pairs will be used (EURUSD, EURGBP and AUDUSD).  The preferred settings for the Bollinger Bands in this strategy are the default settings, which would be a 20 period Simple Moving Average with bands above and below that are two standard deviations away.

EURUSD 4 Hour Backtest

EURGBP 4 Hour Backtest

AUDUSD 4 Hour Backtest

Swing Trading Strategy #2:  Swing Trading 9/20 EMA Crossover

This is an 9 EMA and 20 EMA Crossover with the caveat that both Moving Averages are above or below (in the case of a short position) 50 SMA and a candlestick must close above or below (in the case of a short position) 9 EMA to enter the trade.  The exit is placed when the two moving averages crossover in the opposite direction.  It is done on a 4 Hour Chart.

Strategy #3:  The “So Easy It’s Ridiculous” Trading System

The “I Can’t Believe It’s Not Butter” of Swing Trading Strategies, at least when it comes to the name of it.  BabyPips created it, Freevestor is going to test it out with EURUSD.

The Rules:

Trading Setup

• Trade on Daily Chart and 4 Hour Chart)
• 5 SMA applied to the close
• 10 SMA applied to the close
• Stochastic (14,3,3)
• RSI (9)

Entry Rules

Enter LONG if:

• The 5 SMA crosses above the 10 SMA and both Stochastic lines are heading up (do not enter if the Stochastic lines are already in the overbought territory)
• RSI is greater than 50

Enter SHORT if:

• The 5 SMA crosses below the 10 SMA and both Stochastic lines are heading down AND (do not enter if the Stochastic lines are already in oversold territory)
• RSI is less than 50

Exit Rules

• Exit when the 5 SMA crosses the 10 SMA in the opposite direction of your trade OR if RSI crosses back to 50
• Exit when trade hits stop loss of 100 pips

Thoughts on these Swing Trading Strategies

These Swing Trading Strategies leave a bit to be desired.  If they succeed, there’s not enough trades, but if they fail to generate profits it is just a feature rather than a bug in the system.  The main problem is that these are manual trading strategies and there simply is not an adequate sample size when manually performed.

Can these Swing Trading Strategies be re-worked and revised?  Certainly.  In fact, the BabyPips Swing Trading Strategy with some changes could be a good strategy on a 4 Hour Chart if revisions are made.  However, at this time none of these strategies can be recommended.  The beautiful thing about automation of trading is that it saves time, removes the human interpretation, and produces the results right in front of you in minutes.

It is possible that the major problem that plagued these strategies may be the matter of the low volatility market environment with only a few events that caused market spikes.

In the case of the BabyPips 4 Hour “So Easy It’s Ridiculous System”, a volatility filter that removed low volatility trades using Average True Range over 20 periods, actually did the trick to turn it profitable after a 3 year span.

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