1 October, 2024
The Blueprint
Being a successful trader isn’t just about knowing when to buy or sell—it’s about having the right systems in place. This blog post breaks down my swing trading process into four main parts: Identify, Control, Mitigate, and Optimise. I’ll walk you through how I streamline my trading decisions, mitigate risks, and plan for the future. Consider this your concise guide to getting the most out of the market.
Why Focus on Systems?
There’s a great quote from James Clear’s "Atomic Habits" that’s stuck with me: “You do not rise to the level of your goals, but fall to the level of your systems.” Think of your goal as your end destination, but it’s the daily habits—the 'systems’—that get you there. Trading can be unpredictable, but placing emphasis on your systems gives you a solid foundation, regardless of the market chaos.
Trading in Four Key Phases
There are four things every good trader does:
Identify: Spot potential trades based on clear patterns.
Control: Manage risk and ensure every trade has a defined risk profile.
Mitigate: Maximise gains while minimising downside risk.
Optimise: Plan for the future, and use defined strategies to ride the trend.
Why Humans Repeat Market Patterns
We’re predictable creatures. Even in financial markets. Jesse Livermore, a legendary trader from the early 20th century, once said, “Price movement patterns are being repeated, as human nature does not change.” It’s this predictability I aim to tap into. The idea is timeless—patterns you see in stocks can also be applied to Bitcoin, gold, or even soybeans. The dance between supply and demand never changes, just the stage.
The Difference Between Knowledge and Skill
Bruce Lee said, “I fear not the man who has practised 10,000 kicks once, but I fear the man who has practised one kick 10,000 times." This rings true for trading. It’s about mastering a handful of setups (chart patterns) and practising them until they’re second nature.
Having knowledge is one thing, but skill comes from experience. You could watch Tiger Woods swing a golf club for 50 hours or read a hundred books on swimming – but until you’re actually on the green or in the pool, it won’t make much difference. The same goes for trading; you’ve got to get in there, get your trades on, and learn from your wins and losses.
So how do we build that skill? Through deliberate practice. That means focused work on specific areas with feedback loops that improve performance over time. For us traders, this could mean studying historical setups, analysing trades, and learning from both successes and mistakes.
Identify Phase: Spotting Trade Setups
When identifying trades, remember the key things you’re looking for:
Repeatable Entry Criteria: Simple setups you can spot quickly.
Asymmetric Reward-to-Risk: Risk £1 to try and make £5, £10, or even £20.
Immediate Profit: Ideal trades usually show profit right away.
Clear Selling Guidelines: Know when you’re getting out.
Most of the trades I go for show up in chart patterns like cup and handles, flags, or wedges. I’ve spent years looking at millions of charts, and what I’ve found works are specific triggers based on candlesticks. These are trigger bars, shakeout demand tails, and gap-down reversal bars.
Three Candlestick Setups Explained
These candlestick patterns offer a good visual for understanding where supply and demand are interacting:
Trigger Bars: Small, tight bars with minimal price movement, indicating limited supply.
Shakeout Demand Tails: Long shadows at the bottom of a bar, which undercut recent lows, scaring you out, but then show strong buying.
Gap Down Reversal Bars: The stock gaps down but recovers quickly, signalling strong demand.
These setups work across many financial instruments. It doesn’t matter if it’s Apple or Bitcoin—I’m looking for signs of human nature repeating itself.
Control Phase: Managing Risk
Trading can make you a fortune—or lose you one. Controlling risk is vital. One of the core principles here is that drawdowns are the enemy of compounding. The deeper you fall, the harder it becomes to climb back up.
For instance, let's say you lose 30% of your capital. You’d need a 43% gain just to break even. But if you limit that drawdown to 5%, you need only a 5.26% recovery. The lesson: avoid large losses.
How to Manage Position Sizing
The sweet spot for initial stop-losses tends to be around 2-4% on the daily chart. This typically keeps risk manageable while allowing for breathing room for the trade. As for total account risk? I aim for roughly 0.25% to 0.5% on each trade. That way, if a trade goes sideways, I'm not losing sleep—or significant capital.
I also use buy stop limit orders with attached stop losses on nearly every trade. It forces discipline and takes out the guesswork in the heat of the moment.
Mitigation Phase: Minimising Downside
Once a trade's moving in your favour, it's time to consider mitigation—because it’s not about optimising profits just yet.
When I talk about mitigation, I’m talking about trying to reduce the risk of losing gains you've already seen. In strong markets, I’m comfortable selling off a third of my position once it hits two times my stop-loss. But in choppy or hostile conditions, I may sell half, or potentially adjust my stop-loss higher sooner.
The idea here is that you "free roll" the trade. By selling part of your position after it’s moved up, the gains cover your remaining risk. Suddenly, you’ve removed much of the worry, which makes decision-making clearer.
Optimise Phase: Riding the Trend
The final part of the process is letting your winners run by optimising. Knowing when to get out with a profit is a tricky art. I've found that staying in a trend often gives the best returns, especially when the price stays comfortably above its 10-day moving average (MA) or 21-day MA.
A good rule of thumb is to use set trailing stops below the 10-day and 21-day moving averages. I like to keep an eye on these, but also stay flexible. For example, if a stock pushes way ahead and shows signs of overextension, I may ‘choke off’ part of my position.
My Daily Routine
Systems aren’t just for the trading desk—they extend into everything I do. Trading markets in the US means my day starts around 7:30 am and goes on until the closing bell at 9:00 pm.
My mornings are reserved for deliberate practice, where I focus on honing my trading skills—whether through back-testing setups or reviewing previous trades. After a family break, the afternoon is for executing my trading plan and watching the markets.
By evening, I’m reviewing the day's trades, scanning for fresh setups, and planning for tomorrow to ensure I’m always a step ahead. I enter my orders for the next session, which saves me from being reactive during market hours.
Conclusion
Swing trading success isn’t about flicking a switch or trying to predict short-term market moves. It’s built on robust systems—steps you can follow day in, day out. By focusing on identifying, controlling, mitigating, and optimising, you can create repeatable processes that lead to consistent results.
Remember, the big wins you can capitalise on don’t just come from luck. They come from practice, dedication, and refining your process continually.
Have a think—what’s one small improvement you can make to your trading systems today?