Swing Index

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Introduction

From the very their very first trade to last their latest trade, successful traders are always looking to take positions in the same direction of the broader market. “The trend is your friend” is common cliché novice traders are taught. By trading in the same direction of the broader market traders can improve their odd of success. The challenge is knowing when the trends will begin or end. By focusing on strength of the market, traders are looking to either confirm that market current trend will continue or they are looking for signs of weakness which alert them to possible trend direction changes.

Welles Wilder developed the Swing Index to determine the real strength and direction of the market by analysing the high, low and close prices of a stock. In Wilder's seminal book "New Concepts in Technical Trading Systems" he describes to his readers how to create and use the Swing Index.

Formula

Where K = the largest of:

  1. H2- C1
  2. L2 - C 1

And L = Value of a Limit move in one direction.

To calculate R, determine the largest of :

  1. H2 - C1
  2. L2 - C1
  3. H2 - L2
If (1) is the largest, R = (H2 - C1) - .5(L2 - C1) + .25(C1 - O1)
If (2) is the largest, R = (L2 - C1) - .5(H2 - C1) + .25(C1 - O1)
If (3) is the largest, R = (H2 - L2) + .25(C1 - O1)

Where:

  • O1 = Yesterday' s Open
  • O2 = Today's Open
  • H1 = Yesterday' s High
  • H2= Today' s High
  • L1 = Yesterday' s Low
  • L2 = Today' s Low
  • C1 = Yesterday' s Close
  • C2 = Today' s Close
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Interpretation

The Swing Index indicator formula uses High, Low, Open, and Closing prices to calculate the Swing Index values (SI). When index line falls below the zero line it represents a fall in the stock’s price. Conversely, when the Swing Index crosses above the zero line, it represents that a stock’s price is increasing. A small or large swing index value shows the strength of the stock’s price's increase or decline.

The Swing Index indicator is an oscillator with values that range from 0 to 100 for up price movements and 0 to -100 for a down price movements. Simple buy signals can be generated when the SI line crosses above the zero line from below. Vice versa, simple sell signal can be generated when the SI line crosses below the zero line from above.

Accumulative Swing Index

Wilder’s Swing Index is criticized by some traders who feel that it is not a good predictive tool. Wilder created the Accumulative Swing Index (ASI) to address some of that criticism. The ASI is built upon the Swing Index and is designed to provide a measure for the breakout potential of a stock. Trend line breaks on the ASI can be used to confirm trend line break of the underlying stock in addition to using to the zero line as trigger signals. 

Conclusion

Traders can use the Swing Index to determine the real strength and direction of a stock by analysing its high, low and close prices. By focusing on strength of a stock, traders can confirm if a stock’s current trend will continue or they are look for signs of weakness which alert them to possible trend direction changes. Like all technical indicators, traders and investors can increase their probability of success by employing multiple indicators to confirm trading signals. Regardless of what trading indicator you employ, you must select the indicator that fits your personality and ability to take risk. As we have seen the Swing Index is a versatile tool that can be used by investors and traders to improve their odds of trading.