Trading Psychology Weblog Swing Trading Methodology
Brett N. Steenbarger, Ph.D.
This article was written on 1/4/04 and summarizes the use of the Weblog measures
in a swing trading methodology.
When I developed my short-term (intraday) trading methodology, I anchored it in a
measure of trend tendency (trendiness) that I called the Power Measure.
In my historical
tests, I noticed that the Power Measure hovered near zero during periods of market
consolidation and abruptly rose or declined during breakouts from consolidation ranges.
Simplifying markets by categorizing them as either uptrending, downtrending, or
consolidating, I was able to formulate trading guidelines for each market mode.
uptrending markets, I bought pullbacks that remained above regions of well-defined
institutional selling; in downtrending markets, I sold rallies that failed to surmount
regions of well-defined institutional buying.
In consolidation range trading, I used a real-
time measure of the number of stocks making new highs and new lows to either validate
candidate breakouts (and trade them) or invalidate the breakouts (and fade them).
When developing a swing methodology, such categorization of markets—and
development of separate strategies for trading each category—was once again my aim.
The challenge that arose is that the variables that drive the market over an intermediate-
term trading time frame (weeks to months) are different from those that move the market
In a sense, intraday trading is easier.
Once you can figure out trend,
momentum, and institutional activity, you can wait for all three to move your way and
then just climb on board.
The real problem with intraday trading is overtrading.
start trading when those three variables aren’t moving in the direction of the trade, the
combination of the lower winning percentage and the higher transaction costs takes its
toll over time.
On an intermediate time frame, trend, momentum, and institutional activity are most
Equally important, however, are three other variables:
– I’ve written a recent article on this topic, and it is must reading for
understanding the swing trading system that I am implementing.
trading, I solved the stationarity problem by trading a narrow time frame
measured in minutes.
If the trade did not go my way in a very short time span, I