SWING-HIGH AND SWING-LOW COMMODITY TRADING TECHNIQUE & HOW DRAWDOWN MINIMIZER LOGIC CAN GREATLY REDUCE EQUITY DRAWDOWNS & LOWER THE RISK of TRADING FUTURES
This powerful but at same time fairly simple trading technique can help you significantly in your commodity futures trading success, assuming it's used and applied properly, of course. This "market structure" trend direction method is basically a pattern recognition method which is also surprisingly simple at the same time.
Market Structure is the best way we have found to identify market direction and define bull or near moves.A structured market is based on the observation if you closely study a bar-chart of most any financial market, you will more or less clearly see a bear market consists of mostly a series of lower highs and a bull market consists of mostly a series of higher lows.
These higher-lows and lower-highs are referred to by Commodity Traders Club as Swing-Lows and Swing-Highs, also known as Pivots, or Pivot-Points.
A swing-low is defined as a low day (or bar) with higher prices both in front and behind the low day (or bar), thus forming a swing-low. This swing-low must also be above the previous swing-low, thus forming a higher swing-low.
A swing-high is defined as a high day (or bar) with lower prices both in front and behind the high day (or bar) forming a swing-high. This swing-high must also be under the prior swing-high thus forming a lower swing-high.
The concept of buying higher swing-lows or selling lower swing highs are being used by the most successful large traders. This concept has been used by them for a very long time. These traders don't talk much about this simple but potentially profitable technique. Very few traders are familiar with this powerful, yet simple technique.
Merely buying higher lows and selling lower highs by themselves can dramatically improve your trading results. You also need to know where to place a target so you can get out of the market once your profit objective is reached. You need to know where to place a protective stop-loss if the trade is wrong. For this we strongly recommend you use "Drawdown Minimizer Logic®" which is explained in detail in CTCN Special Report #2. Drawdown Minimizer Logic is a mathematical methodology to sharply reducing drawdown based on past "adverse excursions."
A sample bar price chart showing how to use swing-highs and swing-lows (aka market structure) to trade successfully is in print copy.
The concept of only selling short providing a LOWER "Swing-High" has occurred, and only buying upon the occurrence of a HIGHER "Swing-Low" can be very profitable.
This method appears highly profitable when used on old charts, using some subjectivity on the past data. Old charts and hindsight combine to make it look highly profitable. However, doing it in real-time trading is more difficult.
Selling providing there are 2 or 3 lower days (or bars), instead of just one on each side of a high point qualifies as a more significant Swing-High, and can be very profitable. Of course, the reverse is true for a Swing-Low buy. The more days (or bars) on each side of the swing day (or bar) is better to more clearly define the Swing-High and Swing-Low.
The problem is the fact the more days (or bars) on each side there are, it's likely more of the move is over by the time we can get into the market. Conversely, the fewer days (or bars) of each side of the pivot bar means the move has likely not progressed far. However, it's more likely to be a false or minor Swing-High/Low and consequently less profitable, or a loser.
It's fairly easy to identify and draw buy and sell arrows/dots at Swing-High and Swing-Low points on charts. However, doing it in real-time trading is not as easy as it appears on a back-data bar chart.
Nevertheless, the Swing-High and Swing-Low concepts (aka Market Structure) are in our opinion the best trend identification tool for trading the commodity futures markets successfully. It will "work" in any market, the actual market makes little difference. Of course, as always, trending markets make it work a lot better.
The concept of buying/selling Swing-Lows/Swing-Highs is simple and can be amazingly successful but needs to be combined with a good stop-loss method to give you protection on false signals. It's recommended you use CTCN's copyright "Drawdown Minimizer Logic®" to scientifically set stop-loss levels. "D.M.L." is used by CTCN's Swing Catcher® technical analysis software system but it's not used by CTCN's Real Success method. However, it may successfully be used with it.
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HOW DRAWDOWN MINIMIZER LOGIC CAN
LOWER EQUITY DRAWDOWNS &
RISK of TRADING COMMODITIES
This Special Report reveals an amazing method to reduce risk by staying in good trades, but trading with small stops to avoid large losses.
Usage of stop-loss orders is normally critical to trading success. The most famous trader of all time, Mr. W. D. Gann, said repeatedly in his books and commodity course that it's always critically important to place a stop-loss order on each trade you make. That way bad signals and losing trades will not likely wipe out your trading capital, thanks to your stop-loss order giving you some protection.
Most systems and most trading methods require fairly large stop-loss orders. That is because stops are frequently based on one or more of the following logical (but frequently ineffective) methodologies:
a) Place a stop at a pre-determined percentage of the true daily trading range. For example, if the true daily range or average of recent true ranges (High minus Low, plus any gap between prior close and today's low or high) is say 83 points, then the stop may be set at perhaps 120% of that range or about 100 points. In the Deutsche Mark that equals $1,250.00 stop, plus any slippage that occurs.
b) Another method is placing a stop-loss just under the last swing-low or pivot-low. Note: A swing-low is a low point with higher prices on each side. For example, if last swing-low was at 7650 and price moves up for a few days to say 7750, then triggers a buy signal, stop may be placed just under the low price of the low day, perhaps at 7649. Click-here for Trading Tip-of-the-Day.
That also represents a risk of over 100 points ($1,250.00+). Of course, the reverse is applicable on a sell, with the stop being just above swing-high.
c) Use a moving average penetration as a stop, i.e., place a stop on a long trade at just under a simple moving average, perhaps a nine-day average. The trouble here is that if we entered long at about 7750, by the time the moving average is penetrated by the price, the moving average may be well below the market (due to its inherent lag-time), at 7600 or so. That results in a stop-loss at 7599 stop, and a risk of about $1,900.00.
d) Still another approach is to place a stop under last week's lowest price. This method may be even riskier because last week's low may be 7550. That requires a stop of 7549 or lower, and a risk in excess of 200 points or over $2,500.00.
e) Another simple and a totally unscientific approach is known as a "money stop." It involves setting an usually arbitrary stop based on either the maximum money you wish to lose, or stop based on a reasonable sounding number of points or dollars.
For example, psychologically you may not want to lose more than $1,000.00, so you set your stop at a price equaling $1,000.00 loss potential. That number is arbitrary, so it may turn out to be either too small or too large, depending on the volatility and the market involved. For example, perhaps it's too small a stop for T-Bonds when they're volatile, or too large when they are dull. If using the $1,000 stop-loss in the Corn market or another low-risk low volatility market, it may be too large a stop to use.
Q. Is there a better way to set stops scientifically and more accurately, thus enabling me to keep risk low and still avoid getting "stopped-out" needlessly and stay in the potential winning trade?
A. Yes! By using "Drawdown Minimizer Logic." Drawdown Minimizer Logic is an amazing way to set stop-loss levels very tightly to guard against large losses, yet keep the stop scientifically and strategically placed just far enough away to prevent premature hitting of the stop-loss; thus keeping you in most trades.
Don't worry if this methodology seems too technical, because it's really much more simple than it first appears to be.
"D.M.L." is based on the maximum adverse movement (excursion) of past winning trades. For example, review the last "X" number of back-tested profitable trades and determine the adverse negative excursion incurred on each trade.
The idea is to look at the smallest stop-loss orders that would have kept us in at least 80% of the past back-tested winning trades. The worst 15% of those back-tested winners are eliminated from consideration.
Another important consideration is to review a sufficient sample of trades for statistical validity. According to statistical research by mathematicians, 30 samples are considered an optimum number to review. However, depending on your trading system's frequency, 30 past back-tested trades may take too long a period to test properly or reflect recent volatility.
Therefore, it may be best to work with a minimum number of 10 to 15 past trades. Ten to 15 back-tested trades should work well, but 30 trades are still considered an optimum number to use. However, if it's not practical to use 30 trades, you should at an absolute minimum use 10 trades to calculate the maximum adverse excursions. That way the numbers are still fairly valid from a statistical sampling standpoint.
If the past adverse excursions of those 80% trades went NO MORE than 15 Points negative before eventually being closed out at a profit, we can subsequently set our stop-loss at 16 points. Scientifically we should be able to stay in the vast majority of eventual profitable trades, yet have low-risk by risking only 16 points per trade.
Back-tested closed losing trades are not calculated, because with this amazing technique we only care about winning trade stop levels, not losing trades. The losing trades, of course will have potentially much larger adverse movements. By scientifically using the winners to calculate stop levels, we also take care of the losers by sharply reducing the losing trade stops.
"Drawdown Minimizer Logic" © will sharply reduce your risk level and drawdown potential. It's a proven and scientific way to drastically reduce risk without significantly harming overall profits.
This amazing loss reduction technique will allow comparatively small stop-losses, so your losses are small but still allow for consistent good size winning trades and possibly make lots of money with sharply reduced risk.
It's extremely effective in sharply lowering risk, but still keeping you in winning trades. Surprisingly, few traders use or have heard about this amazing technique, because it's rarely publicized due to the fact it is widely rumored that large successful traders want to keep the methodology secret.
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