3 Primary Rules for Swing Trading

Summary

Dr. David Paul, a seasoned trader since 1982, shares his approach to trading across various markets, including stocks, futures, and Forex. As a trend follower, he emphasizes three key rules: the best trades are difficult, fading short-term trends against longer-term directions, and entering trades where the masses place their stops. His unique perspective on market behavior highlights the actions of professionals and institutional traders, focusing on how the market often moves to areas where retail traders' stops are positioned. Dr. Paul’s insights provide valuable strategies for anyone looking to understand market dynamics and improve their trading approach.

Takeaways

• 😀 Dr. David Paul is an engineer who started trading in 1982 and has been trading independently since 1988.
• 😀 He primarily trades swing stocks over a few weeks and intraday futures, which he started trading around 25-30 years ago.
• 😀 Over the last decade, Dr. Paul has also been trading Forex aggressively, as it became more accessible to smaller traders via the Internet.
• 😀 Dr. Paul is a trend follower but follows three key rules for trading success.
• 😀 Rule 1: A good trade is a hard trade, implying that successful trades often come with challenges.
• 😀 Rule 2: He advocates fading the short-term trend against the longer-term trend, as the market often goes down first before rising.
• 😀 This rule is based on the fact that professionals typically bid low to capture liquidity before a move upward.
• 😀 Rule 3: He focuses on entering trades where most people place their stops, since institutional traders often know where these stops are placed.
• 😀 Dr. Paul explains that the market frequently goes to where the 'obvious' stops are, making these areas predictable for traders.
• 😀 His approach involves anticipating where the majority would place their stops and entering trades at those levels.
• 😀 He uses a lighthearted analogy—smacking oneself with an object when considering stop placement—to emphasize the importance of thinking counterintuitively when entering trades.

Q & A

Who is Dr. David Paul, and what is his background in trading?

Dr. David Paul is an engineer who started trading in 1982. He became a full-time trader in 1988, after leaving the corporate world. Over the years, he has traded various instruments, including stocks, futures, and Forex, with a focus on trend-following strategies.

What types of markets and instruments has Dr. Paul traded over the years?

Dr. Paul has traded stocks on a swing basis over a few weeks, futures on an intraday basis, and more recently, Forex aggressively, as it became available to smaller traders via the Internet.

What is Dr. Paul’s general approach to trading?

Dr. Paul is primarily a trend follower. He bases his trades on the concept of market trends and follows a set of three key rules to guide his trading decisions.

Can you explain Dr. Paul’s first rule of trading, 'The good trade is a hard trade'?

Dr. Paul believes that the best trades are often the toughest ones. A difficult trade indicates that the market is testing your strategy, discipline, and patience, and such trades often align with high-quality opportunities.

What is Dr. Paul’s second rule about fading the short-term trend?

Dr. Paul advocates fading the short-term trend when it goes against the longer-term trend. He explains that markets often dip before rising, particularly in the morning, as professionals use liquidity to drive prices lower before moving them upward.

Why does Dr. Paul say that the market typically goes down before it goes up, especially in the morning?

According to Dr. Paul, the market goes down first because professional traders, like those at Goldman Sachs, use liquidity to bid the market lower. This allows them to accumulate positions before the market moves higher, often creating a dip before a rally.

What does Dr. Paul mean by 'fading the short-term trend'?

Fading the short-term trend means trading against the immediate direction of the market if it contradicts the broader, longer-term trend. Dr. Paul does this because he believes the market often corrects itself after short-term fluctuations.

What is Dr. Paul’s third rule about placing entries near the masses' stop-loss levels?

Dr. Paul suggests placing entries where most traders place their stop-loss orders, as these levels are highly predictable. By doing this, he takes advantage of price movements that occur when the market hits these stop-loss levels and triggers a reversal.

How do market makers and institutional traders affect the behavior of stop-loss orders?

Market makers and institutional traders often know where the majority of retail traders place their stop-loss orders. They may push the price to these levels, triggering a stop-out, before the market continues in the intended direction of the broader trend.

What advice does Dr. Paul give about placing stop-loss orders?

Dr. Paul advises traders to think about where they would place their stop-loss orders and then enter trades just before these levels. He suggests that this strategy can be highly effective, as the market often moves to these obvious stop levels and then reverses.

What is the primary psychological principle behind Dr. Paul’s trading strategy?

Dr. Paul’s strategy is based on the psychology of market participants. He understands that traders place stop-loss orders at predictable levels, and the market often moves to these levels before continuing in the direction of the prevailing trend. This psychological behavior is key to his approach.

What role does market liquidity play in Dr. Paul’s trading strategy?

Market liquidity plays a crucial role in Dr. Paul’s approach, particularly when fading the short-term trend. He notes that large institutional traders use liquidity to push the market to specific levels, allowing them to enter trades at favorable prices before the market moves in the desired direction.