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Swing Trading Process

What is Swing Trading?

Swing trading is a trading style that falls between day trading and position trading. The goal of swing trading is to profit from price "swings" or fluctuations in the market, typically holding positions for several days to weeks. 

Getting Started with Swing Trading

Before you begin swing trading, it is essential to understand key concepts like Supply and Demand, Options Greeks and Risk Management. You can find lessons on these topics throughout the Resources Hub.

Trade Metrics 

My approach to Swing Trading, much like 0DTE, is rooted in a systematic perspective, which means that I have a structured and disciplined approach to analyzing and making trading decisions.

As a matter of fact, the decision-making process is largely the same as our 0DTE processes, utilizing cycles (overbought/oversold) and the Gamma framework to identify control via the Flip and critical supply and demand zones. 

There are additional metrics such as 4-Hour Trend, 1-Hour Trend, DSS 1-Hour, Volatility Risk Premium (VRP), 5-Day Implied Move, Average True Range (ATR) that can assist us in our decision-making process.

These metrics are available in our Daily Market Report within our Key Metrics table and are explained ‘here’. 

Trending or Counter Trend

As always, it's critical to determine whether the opportunity aligns with the current trend or is counter-trend. 

Trend: A trend refers to the prevailing direction in which a stock's price is moving over a period of time. It can be either an upward (bullish) trend, where prices are making a series of higher highs and higher lows, or a downward (bearish) trend, where prices are making a series of lower highs and lower lows.

Counter Trend: Counter trend refers to a strategy that goes against the prevailing direction of the market trend.

A simple method for identifying market trends involves using Simple Moving Averages (SMAs). My personal preference is the 100SMA and 150SMA for the intermediate-term trend, and the 50SMA and 100SMA for the short-term trend.

When the 100SMA is above the 150SMA and sloping upward, it signifies an uptrend.

Conversely, when the 100SMA is below the 150SMA and sloping downward, it suggests a downtrend.

The same logic applies to any set of moving averages, such as the 20SMA and 50SMA or 8SMA and 16SMA However, lower time frames and periods, yield more sensitive signals.

Additionally, utilizing Heikin Ashi candles can reduce noise, smooth out price action, and make trends more visible.

Heikin Ashi candles are a type of Japanese candlestick charting technique that smooths price data to provide a clearer visual representation of trends and reversals in financial markets

When choosing to play counter-trend, it's advisable to give more weight to the higher timeframes, like the 4-hour (4H) and Daily (D) to ensure they are also at extremes (cycle highs/lows) and that price is extended from it's longer-period moving averages such as the 150SMA.

Volatility Flip

The Flip is a transitional strike where we anticipate a change in dealer hedging and, subsequently, a change in the volatility regime.

If the price is below the Flip level, dealers hedge via selling weakness and buying strength leading to higher volatility.

If the price is above the Flip level, dealers hedge via buying weakness and selling strength leading to lower volatility.

When trading, it is generally more attractive to buy dips above the Flip and sell rips below the Flip.

Timing Mechanism

I employ the DSS cycle on two distinct time frames: the 15-minute (15M) and 1-hour (1H), utilizing both cycles in tandem to determine potential 'action points’ for buying or selling.

When both the 15M and 1H cycles are oversold (cycle low), the probabilities favor the upside. Conversely, when both cycles are overbought (cycle high), the probabilities favor the downside.

You can make slight modifications to the DSS settings to improve the signal. This involves changing the K source from close to low when looking for cycle low signals and from close to high when looking for cycle high signals. By changing these settings, price on the 1-hour timeframe nearly always tests the extremes, cycle low at 5 and cycle high at 95, helping to better time entries and reducing ambiguity.

We never want to use cycles in isolation but rather in tandem with our Gamma levels to identify strong support and resistance zones where pivots are more likely to occur.

When structuring swing trades, it's advisable to prioritize major gamma levels for determining entry and exit points, as these are where you expect the highest likelihood of a pivot. The strength of a level can be determined by the notional gamma value, with higher notional gamma indicating stronger levels.

Additionally, markets can remain overbought (cycle high) or oversold (cycle low) for an extended period of time; therefore, we must keep the broader context in mind, ideally aligning with the 4-Hour/1-Hour Trend/Flip and being more tactical if playing the counter-trend.

Options Strategy & Strike Selection

This is ultimately a personal preference, as individuals vary in account size, risk tolerance, and trading styles.

Approaches can range from aggressive, involving positioning with single options that are further out-of-the-money (OTM), to more conservative strategies, which involve positioning closer to the current market price or utilizing vertical spreads.

For those seeking an income-generating strategy, credit spreads can be utilized, which generally offer high probability with lower risk/reward trade-offs.

The level of implied volatility can sometimes help in dictating the most beneficial options strategy. Utilizing the Volatility Risk Premium (VRP) helps determine any added advantage. This metric is utilized to evaluate whether market participants expect higher or lower uncertainty in the future price of the asset.

VRP Premium: This indicates that implied volatility significantly exceeds realized volatility, suggesting that options are overpriced. In such cases, it might be advantageous to sell volatility and/or structure swing trades via spreads to mitigate the impact of volatility crush if it occurs.

VRP Discount: This indicates that implied volatility is lower than realized volatility, implying that options are underpriced. In this scenario, there's no 'extra premium' available to collect as a volatility seller. It's generally more favorable to structure trades that benefit from increased volatility.

VRP Neutral: This indicates that implied volatility aligns more or less with realized volatility. In this scenario, there's no significant advantage in terms of short volatility or long volatility strategies.

Expiration Date

Based on backtesting, trades on the 1-hour (1H) time frame lasts for an average duration of 5 days. If trading debits, it's generally advisable to allow for some extra time when selecting expiration dates, so using a buffer of 5 to 14 days may be more suitable.

You can also utilize the Average True Range (ATR) and 5-Day Implied Move to aid in determining the amount of time price may take to hit a specific target.

Average True Range (ATR): is a technical metric used to measure the volatility of an asset by calculating the average of its price range over a specified period. It helps participants gauge potential price fluctuations, set stop-loss levels, and estimate the time it may take to reach a profit target.

For example, if the Average True Range (ATR) is 2.5, and you enter a trade at 440 with a 10-point target set at 450, it would theoretically take 4.2 days (10/2.5) to reach the target if the price moved in a straight line. However, such a linear movement is rare in reality. Therefore, it's advisable to factor in a buffer when determining your expiration date for the trade.

5-Daily Implied Move: The 5-Day Implied Move is an estimate of the expected 1 standard deviation range for the week (5 days). The 5-day move is updated at the beginning of each trading week calculated on Friday’s closing price from the previous week. 

Stop Loss & Managing Risk

We recommend employing our same methodology for position sizing, Risk & Effective Position Sizing.

Every situation and options strategy is different in terms of stop losses and how to manage losers. Each requires its own separate lesson.

In short, long options or long vertical spreads are risk-defined strategies, with the stop loss technically built into the trade. However, traders often utilize a 50% stop on premium or a technical stop.

As for credit spreads, a common stop loss is 2/3x premium, although many swing traders prefer to roll rather than stop if the trade thesis remains valid. Sometimes, the timing is off.

Once more, every situation is different, and individuals vary in risk tolerance and account size. Therefore, it's up to you to determine the approach that suits your specific circumstances.


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