Fluid
Market Movement
& the 9 Point Swing ...
This is a
guide to a more logical and systematic approach to plotting market
movements, the correct use of which reveals a lot about the markets
- and the people in them.
Swing charts
concentrate on price and it's changes by eliminating other elements
such as time and volume. Key chart features such as support and
resistance emerge clearly, suggesting entries based on breakout
of trading ranges. The technique is popular because it is simple.
Swing-charts requires minimum data manipulation, making the charts
easy to draw by hand on paper or on a spreadsheet.
The Swing-chart
can tell me if I'm wasting time in considering a trade. Like a
pedestrian crossing light, it flashes instructions: walk, don't
walk: trade, don't trade.
Why use Swing Charts?
Most traders
I know, spend too much time looking at too many indicators, much
of the time all giving conflicting signals. Easy to plot and maintain,
swing-charts give you unambiguous representation of the markets
direction both visual, and statistical.
Acting like
sophisticated avionics, your trip computer on the market tells
you when momentum is slowing, offers potential price targets based
on previous ranges, and offers potential to determine when price
will achieve that target. You instantly know where to place entry
and exit stop-loss orders, and as the trade progresses, when and
where to lift your trailing stops to. No guess work, no eyeballing
charts.
Constructing
a Swing-chart by hand gives a good feel for the process. A Swing-chart
is about the direction of price movement, so it uses vertical
columns to show when the direction is up or down. We can distinguish
the direction at a glance. To construct a Swing-chart, you require
open, high, low & close data. There are many variations to how
the traditional swing-chart is drawn, which basically fall into
one of two groups.
Criteria based:
The swing-chart is drawn in accordance with a move of two consecutive
higher closes, or higher lows, and or higher highs etc.
Fixed value : The
swing-chart is drawn in a manner where price action of a minimum
fixed number of ticks or points is recorded. An example might
be a 9 point swing. Every time the market advances or declines
9 points or more, the termination of a previous swing range is
confirmed, and a new plot in the opposite direction continues
until price action of 9 points or greater against the swing occurs.
Fixed session:
The range of a period, perhaps a day or week is converted into
a swing high and low. The day's high would become the swing high,
the low of the day the swing-low. This is also true of intraday
data, where each 10 minute interval for example has a range which
then becomes a swing high and low.
Once again,
a break down from successive higher swings may indicate an exit
from an existing long position.
The Systematic approach
There are as
many ways of trading swing-charts as there are traders, however
a common manner in which these charts are used is by trading breaks
of swing highs and lows. A successive number of swing ranges in
the same direction will give the trader confidence that a trend
has established, and it is safe to enter the market.
The logic is
that if the market has broken a number of old highs, or "swing-highs",
and continues to trade to the upside, then the odds are in favour
of higher highs and higher lows. If a trader were to use swing
charts for no other purpose than to determine the trend, then
fewer trades would result in loss.
Spending the
last three years conducting personal research into swing-charts,
and application on a systematic level, I discovered the approach
of simply trading breaks of the trend, as determined by 9 point
swing chart was quite sound on the whole, but obviously had potential
to perform better. This is why I experimented with the addition
of some filters, to avoid false signals.
In highly directional
markets, the fixed value swing, performed very well, as once the
trend was established, probability of consecutive swings in the
same direction became increasingly higher with each swing.
This was not
only good where "fast" markets were concerned, but the average
profit on each trade was suitably impressive, as in many cases
where markets such as grains, and bonds, it held the position
until the trend had completely terminated, cleverly ignoring short
term fluctuations against the trend.
However, in
markets such as the SPI, and other markets which spend much of
their life chopping back and forth, results would fluctuate from
poor to very good. What was missing was a little consistency in
the results, especially when applied across a variety of markets.
Care was taken
in applying additional filters so the boundary of curve-fitting
or over optimisation was not crossed. This would have presented
outrageously optimistic results in hindsight, while disappointing
in real-time trading. The outcome was one mechanical filter, being
the addition of another swing chart, so that both swing charts,
had to be moving in the same direction to get a signal in the
first place.
The common pitfall
most system designers fall into is the careless addition of non-complimentary
filters, which will usually need to be changed to a blatantly
optimised configuration when the system is being applied to another
market or time frame.
The finished product
At the end of
it all, what I came up with , was quite different to what I had
set out to construct in the first place. This is not surprising
since along the way inconsistencies were revealed in certain approaches,
and obvious curve-fitting had become apparent in many of the models
tested.
This was positive
in a sense, demonstrating core issues to learn from and keep in
mind for future development. Above all else, the objective for
designing the system was ease of use and practicality from intraday
trading out as far as long term, institutional approach.
A fixed-tick
swing was chosen for ease of adaptation to changing market characteristics.
Obviously if the system was based entirely around a simple 9 point
swing with filter, this would almost certainly have to be curve-fitted.
Instead, I came up with a volatility based swing chart, which
would firstly have calculated, such information like the average
daily range, true-range, and average tick change.
If you were
for example trading Coffee or the S&P500, the average tick change
would be quite significant, introducing slippage as one of just
a long list of conspirators to such an approach.
Secondly, in
the case of both markets, but particularly the S&P500, the average
daily range in the last 3 years has almost trebled. This means
what might have been a 9-point swing back three years ago, may
now have to be a 27-point swing, or does it?
Investigation
into this issue revealed that in the case of a stock index, where
the value increases exponentially over a period of time, so too
does the daily range and therefore average tick. Designing a system
around a futures contract on the notion that neither the volatility
of the market will change wildly, or that the tick value daily
range, or trading times will change is suicidal.
Recently the
trading times of the Share Price Index traded on the SFE was lengthened
to 4.25pm in the afternoon, extending it by another 10 minutes.
Back in late 1993, the tick value of the SPI changed from $100
per point to $25 per point.
At the same
time, the minimum tick was changed from 0.1 points to 1point(except
on expiry day). This basically means any system which used time
of day, tick value, (or "hard money" stops and targets) would
potentially come unstuck, obviously revealing the curve-fitted
nature of their construction.
James Archibald
- Tricom Futures Services - Ph: (07) 5526-8899
