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How to Build a Simple Swing Trading System

A swing trading system trades the swings between market highs and lows. Any time frame can be used to define the swings. This paper uses the discovery of a multiday anomaly in the S&P futures (see Testing for Changes in Market Structure) to build a simple swing trading system.

Calculation of the swing point can be quite intricate but starting simply by using a close surrounded by two lower closes as a swing high and a low surrounded by two higher closes as a swing low, is a good place to start.

For buying and selling rules, from the paper "Testing for Changes in Market Structure," it looks like there's an edge when a higher swing high or a lower swing low forms, so...

The entry rule for the swing systems is:

• Buy after a swing high higher than the prior swing high


• Sell after a swing low lower than the prior swing low

But when after? Buying immediately after a swing high leads to too many (and too large) drawdowns. It turns out that bouncing off the opposite swing low for buys and the opposite swing high for sells works. Simple choices and simple intuitions once again.

The expanded entry rule for the swing systems is:

• Buy after a swing high higher than the prior swing high at the 2nd most recent swing low


• Sell after a swing low lower than the prior swing low at the most recent swing high

For this early stage of development/exploration, a simple exit rule of exiting on the first profitable close or after n days seems reasonable and, in fact, works:

• Exit longs on the first profitable close or after 3 days, and


• Exit shorts on the first profitable close or after 3 days

Results for the sp big contract, 01/01/97 - 04/03/09:

• 346/449, 77%, avg 1.7 pts, sd 18.0 pts, t 2.0

The system is profitable nine of the last 12 years, it trades both long and short (important for adaptability to market changes), and is statistically valid (t score).

All it lacks are stops and maybe a filter or two. (The filters are hinted at in Testing for Changes in Market Structure. Note again how well the simple choices worked at each decision point in designing the system.

This example highlights the bottom-up approach to designing trading systems: find an anomaly and then build a trading structure around it.

Henry Carstens
Vertical Solutions
carstens@verticalsolutions.com