direction of tlie major trend. Tills trend is defined by confirming higher highs and higher lows (uptrend), or lower lows and lower highs (downtrend), where the penetration filter is not broken in the reverse direction. That is, an uptrend is still intact as long as prices do not decline below the previous pivot point by as much as the penetration filter size (seen in Figure 12-2). Once the trend is identified, positions are added each time a new penetration occurs, confirming the trend direction. A stop-loss is placed at the point of penetration beyond the prior pivot point. Unfortunately, the pendration filter is not the same as a pivot point, and Livermore never revealed how it was calculated. It seems, however, to be a minor percentage (for example, 20° o) of the current swing size.

Failed Reversal

In the Livermore sjstem, the first penetration of the stop-loss calls for liquidation of the current position. A second penetration is necessarj to confirm the new trend, if the second penetration fails (at point in Figure 12-4), it is considered a secondarj reaction within the old trend. The downtrend may be reentered at a distance of the swing filter below K, guaranteeing that point is defined, and again on the next swing, following pivot point M,

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FIGURE 12-3 Trend change.

when prices reach the penetration level below pivot point L. It is easier to reenter an old trend than to establish a position in anew one.

Percentage Swings

The minimum swing value, which is the only determinate of the swing high and low points, can be more robust if it is a percentage of price rather than a fixed number of points or fixed dollar value. Many markets have doubled in value over the past lOyears-in stods the price of a technologjissue could have increased 20 times and then aplit. A fixed value for finding the swing highs and lows will be far apart at low price levels and too frequent at higher prices, unless that minimum is calculated as a percentage, p.

FIGURE 12-4 Failed reversal.

Confirms major downtrend

fcnetration of slop-loss ends downtrend

"Secondary reaction" if failure to confirm uptrend

Sell at swing filter if uptrend bits

SellQeainwher

Minimum swing value MSV, =/? x price,

The most basic sj-stematic approach to trading a swing method is simpty to buy when prices move up from the recent lows by the minimum swing vahie (MSV), and sell when prices fall by the MW from the recent high. The rid; of each hade is ahvaj-s equal to the current value of MW

Finding the Swing High and Low Points

The following Easj Language program, KSWING, plots the swing high and low based on a percentage minimum swing value. For percentage swings, the interest rate yield should he used rather than price.

IKSUING: Finds most recent swlnt) highs and lows.

Plots values on a TradeStation chart. Copyright 1994-95. P.J. Kaufman. All n. reserved.

inputs for KSUING: swing - price swirg ir %\

inpLt; swing<2.6);

vers: pcswlng(O), lest(O), curhigh(O), CLrlow(O), swhigh(O). swlow(O),

hlghbar(O), lowbar(O), chighbar(O), clowbar(O), lDwp{OJ, higtip(O), xclose(O), xtiigh(O), xlow(O), divide{4);

pcswlng = swing / 100.;

rdlvlde* positions the high or low rrarket on the plot divide - 4; factor - I;

lINlTlAtlZE MOST RECENT HIGH AND LOW) if CLrrentbar = i then begin

curhigh = close; {current highi

curlDW = close; Icurrent low)

end;

ISEARCH FOR A NEW HIGH -- favor reversals! if lestoi ther begin (REVERSE FROH HIGH IF MINIMUM % SUING! if low < curhigh - corliigh*pcswing then begin last - 1; llast high fixed)

swhigh - curhigh; Inew verified highl highbar = chighbar;

curlow - low; unitialize new lowsl

lowp = low; (swing low for plot)

clowbar = currentbar;

p1oll[cLrrentbar-liighbar](high[ciirrentber-highberI"+ highp*pcsw1rg/d1vtcle, "swinghigh"); end else begin

If high > curhigh then begin

curhigh - high; Inew current high)

chighbar - currertber;

end; end; end;

(SEARCH FOR A NEW LOW - favor reversal)

if last <> I then begin (REVERSAL FROM LOU TF MINIMUM % SWlNGl

If high > curlow + curlow*pcswtng then begin last = -1;