Swing Trading and Market Timing Knowledgebase

By: John Crane, swing trading guru

Reaction Swing Trade

So far I have talked extensively about the Reaction swing and what to do after the trigger price is hit and the trade is entered. I have also explained the reverse/forward count process to project Time and Price with a high degree of accuracy. But, we all know not every confirmed Reaction swing pattern is going to carry through and offer a risk free trade. Nothing is 100% percent.

A Reaction swing is confirmed when the futures market trades through the previous high or low pivot price and reaches a new high or low. New highs and new lows are usually significant price junctures watched by day traders, swing traders and trend traders. The ability for the futures market to exceed a previous high or low is a powerful signal and can trigger a chain reaction of new buying or selling activity.

Of course, for a futures market to continue the breakout and establish a longer-term trend it must maintain momentum and continue to make new highs or new lows. The futures market timing behavior after the breakout is very important and can provide insight into future price action. However, I use a “Market timing Tell” as a secondary confirmation of the buy or sell signal. It is based on the futures market timing action that occurs after the Breakout bar. (The Breakout bar is the price bar that penetrates the pivot high or pivot low and triggers the entry signal.)  Let’s take a look at the rules for this “Market timing Tell” conformation of a bullish Reaction swing.

Once the futures market has traded above the Reaction swing high and triggered a buy signal (in an upward trending futures market) it should remain above the low of the Reaction swing and close above the pivot high by the third price bar. Therefore, after the entry the initial protective stop is placed underneath the low of the Reaction swing. After two consecutive closes above the pivot price the protective stop can be placed underneath the low of the Breakout bar. After the a third close above the pivot price the protective stop can be moved to the entry level. I have found a futures market that closes above the pivot price for three consecutive days has a high probability of continuing the current trend into the next projected swing trade date.

Once the protective stop is at the entry level, I will usually give the futures market timing room to fluctuate until it approaches the swing trade date. After the close of the swing trade date, I will place the protective stop underneath the swing trade date low and repeat the same procedure after each successive higher close until the stop is elected. Of course, this procedure can be modified to fit the risk tolerance of the individual trader. Figure # 6.1 illustrates how the pattern should unfold.

swing trading chart
Figure # 6.1 – Breakout bar – Pattern confirmation

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**THE RISK OF LOSS IN TRADING CAN BE SUBSTANTIAL. YOU SHOULD, THEREFORE, CAREFULLY CONSIDER WHETHER SUCH TRADING IS SUITABLE FOR YOU IN LIGHT OF YOUR FINANCIAL CONDITION. HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER OR OVER-COMPENSATED FOR THE IMPACT IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT.NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES.

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