Swing Trading Strategy | Rubber Band
The rubber band swing trading strategy waits until price pushes through an an extreme level and then snaps back in reversal. Trades jump in swiftly and with precision to grab a quick slice of the counter trend just as it develops. It can be traded in nearly any time frame, and longer-term chart set-ups offer amateur traders a relatively high chance of success.
High success rate for beginning swing traders
Novice traders (as well as more experienced but unsuccessful traders) should trade the rubber band swing trade strategy on weekly and even monthly charts for a greater chance of success. This is true for many reasons, such as:
- Significantly less competition
- Price trends are much less subject to whipsaws, stop guns, and other insider manipulation
- Less demanding of an environment – with time to plan each trade
- Significantly reduced transaction costs – which are much more costly to trading success than most traders realize
- Preset profit target and stop loss placement does not allow for impulsive trade execution
Traders with proven track records can also include trading the daily and 60-minute charts with a reasonable success rate. For day trading the rules change a bit - see the False Breakout Rubber Band Day Trading Strategy in the Day Trading Strategy section for day trading.
Rubber band swing trading strategy | Set Up
To open the window for trade entry, price must first trade outside of a 40-period Keltner Channel Indicator with a standard deviation of 4.0 (shown in red on the chart). Disqualify set-ups, however, when price is riding along with the outer band and does not penetrate and reverse sharply.
Observe how price trades outside of these bands five times in the chart as noted by the blue ellipses on the chart to the right. We do not enter here, but the window for trade entry has opened. Click the chart to enlarge.
Rubber band swing trading strategy | Entry
Once the swing trading window is open, we use a second 40-period Keltner Channel to pinpoint trade entry. This Keltner Channel will have a setting of 2.0 standard deviations (shown in light blue on the chart). Set a buy stop order (or a sell stop for short trades) to get you into the trade at this level. If you are trading daily and 60-minute charts, make the entry order good for the day only. If price gaps through your entry target overnight the trade will have to be abandoned. Weekly and monthly chart set-ups will rarely have this problem.
On the chart to the right, note the 2.0 standard deviation band shown in light blue and the trade entries marked as points “B”. Enter at this level as price crosses the light blue line.
Rubber band swing trading strategy | Profit Target and Stop Loss
The profit target is the center band of the Keltner Channel, which the same thing as the 40-bar EMA (exponential moving average). The stop loss is placed back at the extreme band (the 4.0 standard deviation band). Targets are noted on this chart at points “C” and stop losses are points “D” (click the chart to enlarge). Once they are set, you are done managing the trade.
The results of the trade are now out of your hands. Either a continuation of the trend will take out your profit target – or a reversal of the trend will take out your stop. Be sure to set your limit and stop market order right away when you enter each trade – the Keltner Bands move with time and you will not know where to place your target and stop loss if you wait.
Free Swing Trading Signals
Visit our free swing trading signal blog to follow what we are trading in real time. Most of the swing trade set-ups we feature are from The Rubber Band Swing Trading Strategy. Click here to see the most recent swing trading signals and set-ups.