Trend-following swing setups

What you will learn

• How to write a trend filter for the daily chart as a yes/no checklist
• How to measure a pullback in ATR units and judge whether it is healthy or too deep
• Three entry triggers and what each one costs in risk
• How to place the stop with an ATR buffer and compare the target in R

Explanation

A trend-following swing setup buys a temporary dip inside an existing uptrend (or sells a temporary rally inside a downtrend) and aims to capture the next leg in the direction of the trend. The basic trend pullback was introduced in the Trading course and moving averages are covered in the Technical Analysis course. This lesson makes the setup precise enough to apply the same way every time.

Step 1: a written trend filter

Each condition must be answerable with yes or no. An example for long trades:

1. Price closes above the 50-day simple moving average (SMA).
2. The 50-day SMA is higher than it was 20 trading days ago (it is rising).
3. The 50-day SMA is above the 200-day SMA.
4. The share passed your scan from lesson 2 (positive relative strength).

If any answer is no, there is no trend-following long trade. The filter does not need to be perfect; it needs to be consistent so that your results can be reviewed later.

Step 2: measure the pullback

A pullback is a move against the trend from the most recent swing high. Measure its depth in ATR units:

Pullback depth (ATR) = (swing high − pullback low) ÷ ATR

Rules of thumb used by many swing traders (heuristics, not laws):

• About 1 to 3 ATR: a normal pause in a trend. This is the main zone for entries.
• Less than 1 ATR: barely a pullback; the reward to the old high is small.
• More than about 3 to 4 ATR, or a close below the 50-day SMA: the trend may be breaking. Treat it as a warning, not a bargain.

Also look at how the pullback forms. Smaller daily ranges and falling volume during the pullback suggest profit-taking; large red candles on rising volume suggest active selling.

Step 3: choose an entry trigger

An entry trigger is the exact event that opens the trade. Buying simply because price is "low" means catching a pullback that may continue. Three common triggers:

Step 4: stop and target

Place the initial stop below the pullback low with a buffer, for example 0.25 ATR, so that ordinary noise around the low does not trigger it. The first target is usually the previous swing high, where sellers appeared before. Calculate the reward in R; if the distance to the swing high is less than about 1.5R, the trade has little room. Exit management (trailing, partial exits, time stops) is covered in lesson 8.

Worked example

Hypothetical example: a share passes all four filter conditions. Swing high €104.00, pullback low €97.00, ATR €2.50. Yesterday's high was €97.90. Account €25,000, risk 0.6% per trade.

1. Pullback depth: (€104.00 − €97.00) ÷ €2.50 = 2.8 ATR. Within the normal zone.
2. Entry trigger: buy stop at €97.90 + €0.10 = €98.00.
3. Stop: €97.00 − 0.25 × €2.50 = €96.375, rounded down to €96.35. Risk per share: €98.00 − €96.35 = €1.65.
4. Risk budget: €25,000 × 0.006 = €150. Shares: €150 ÷ €1.65 = 90.9, rounded down to 90. Actual risk: 90 × €1.65 = €148.50. Position value: 90 × €98.00 = €8,820.
5. Target at the swing high: (€104.00 − €98.00) ÷ €1.65 = 3.6R.

Excluded: commission, spread and possible gap fills above €98.00. A position of €8,820 is 35% of the account; lesson 7 checks whether that is acceptable when gaps are considered.

Common mistake

Practice activity

Hypothetical data: a share passes the trend filter. Swing high €52.00, pullback low €47.60, ATR €1.60, previous day's high €48.40. Risk budget €120. Buy stop €0.05 above the previous high; stop 0.25 ATR below the pullback low.

1. Calculate the pullback depth in ATR.
2. Calculate entry, stop and risk per share.
3. Calculate the number of shares and the reward in R to the swing high.

Key takeaways

• Write the trend filter as yes/no conditions and apply it every time.
• Measure pullbacks in ATR: about 1 to 3 ATR is a typical healthy zone.
• Enter on a trigger that shows price turning, not inside the falling pullback.
• Stop below the pullback low plus a buffer; check the reward in R before entering.

Next step

In the next lesson you learn breakout-and-retest setups, where a former resistance level becomes the place to enter.