One of the main problems we see every day in trading is that most strategies are too static and inflexible, whereas markets are very dynamic and constantly undergoing changes. This then leads to very inconsistent results where traders experience periods with positive performances, followed by periods where nothing seems to work. Usually, this can be traced back to the changing nature of the markets.
A trader who understands how to choose the markets they trade and also knows how to adapt their trading style can often achieve much better results while avoiding some of the most common problems many traders struggle with.
Day Trading vs. Swing Trading
There are generally two main approaches to trading: the first one is swing trading, where you typically trade the higher time frames such as the weekly, daily or the 4H; and day trading where you trade lower time frames and follow a more active approach.
Whereas most traders usually think they have to choose one or the other, the professional trader understands that he can get the best of both worlds and adapt with his trading approach based on the current market environment.
Understand the Market Environment
In order to make correct assumptions about whether you should choose a swing-trading or day-trading approach, you have to understand the market environment you are trading in. During strong trending markets, it is usually better to stick to a swing trading approach and ride the trends for longer periods. Then, when markets enter a range market and consolidate on the higher time frame, you should focus more on day trading and look for short term opportunities on the lower time frames to “escape the noise”.
Swing trading during range markets is usually much more difficult and the constant shift between bullish and bearish range waves can pose great challenges for swing trading methods which then leads to frequent losses or very small gains. On the other hand, day trading during high momentum market periods can lead to frustrations because you are typically only able to capture relatively small gains while you miss most of the trend following action.
Don’t mix the two
Many traders make the mistake of trading a swing trading and a day trading approach at the same time. And even if you are trading swing and day trading strategies on different markets, following completely opposite approaches at the same time can cause emotional problems.
If you are in a swing trade on one market, but day trading another market, you can very easily create a wrong market perception where your swing strategy influences your day trading approach and vice versa.
Thus, we recommend only trading one strategy at a time and not mixing day and swing trading. Now, we show you how to create a dynamic approach and when to switch between swing and day trading.
Time-Frame Selection
Every good market analysis starts on the higher time frame and the top down approach is usually the best way to get a good understanding of the markets you trade.
The screenshot below shows the daily time frame of crude oil and it is obvious how high momentum trend periods and tight range periods keep alternating. This is a typical pattern and it nicely illustrates the general market rhythm that you can see across all financial markets.
Every Sunday, you should take a look at your daily time frame to get an idea of whether you are trading in a trending or ranging market environment. If you can see precisely defined range boundaries and a lot of back and forth, you should opt for a day trading approach and probably go down to the 1H or even 30 min time frame to avoid the range-noise of the higher time frames. And if you can identify a high momentum trending market you should switch to swing trading and look for trend following trends on the 4H or 1H time frame.
ADX as tiebreaker
Looking at a chart and saying that it was a range or trend period is easy with the benefit of hindsight. However, when you have to make decisions under uncertainty, we recommend adding additional helpers and filters that can help you make more objective decisions. The ADX is a great indicator that provides information about the momentum stage of price action.
The screenshot below shows the same crude oil chart, but this time with the ADX indicator. You can see that whenever price changes from a trend to a range market, the ADX falls or is flat. And during trending periods, the ADX starts rising above 20 or 30.
Thus, the ADX can be used as a tiebreaker that allows you to make objective decisions about the stage of the market you trade.
ADX falling: Potentially entering a range market
ADX falling and below 30: Price in a range
ADX rising and above 30: Price in a trending phase
Most traders don’t understand the market environment they are trading in and they are always applying the same principles without adapting to momentum and volatility changes. If you want to create a highly flexible trading approach that can deal with all market environment, you should first learn how to differentiate between trending and ranging markets and then choose your trading approach accordingly.
There is a substantial risk of loss in futures trading. Past performance is not indicative of future results.
