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80

swlow = curlow; lowbar clowbar;

curhigh = high; (initialize current high!

highp = hiqh; (swing bigh for ploti

chighbar = currentbar;

plot2[currentbar-lowbdr]{low[CLirrentber-lowbflr] lowp*pcswing/(]ivide, "swinglow"); end else begin

if low < curlow then begin curlow = low; clowbar = currentbar; end; end; end;

Wilders Swing Index

An automated way of determining swings is presented with trading rules in Wilders Swing Index Sjstem Wilder has ddermined that the five most important positive pattems in an uptrend are:

1. Todays close is higher than the prior close.

2. Todays close is higher than todays open.

3. Todays high is greater than the prior close.

4. Todays low is greater than the prior close.

5. The prior close was above the prior open.

in a downtrend, these patterns are reversed.

The Swing Index M combines these five factors, then scales the resulting value to fall between 100 and +100 as follows:

(C - .) - XC ~ .. - , -j

whcrcfTisihelaigesiof.-C , and I,- , , M is the value of a limit move R is calculated from the following two steps:

1. Determine which is the largest of

a. b.

C. H,-L.

2. Calculate R according to the corresponfbng formula!

a. R = (H, -C.,) - -5(i, -C-1) + .25(C,-. -O,..)

b. J?=(I,-C,..).5(«,-C-.>+ 25(C,.,-0,.,)

c. R = (H, -L + 25(C, , - O,..)

.A.lthough the usefulness of the SI cannot be determined without proper testing, the formulas combine factors



that have a great deal of interest. The SI calculation uses three

J Wfelles Wftl.ler, Jr , New -.Ľuce-t: m Teclmical Trading cy.-teii, (TrendEesearcL, ieensboro, lYJ. 1S7B)

price relationships, the net price direction (close-to-close), the strength of todays trading (open-toclose), and the memory of yesterdays strength (prior open-to-close). It then emploj-s the additional factor of volatility as a percentage of the ma.ximum possible move (KIM). The rest of the formula simply scales the results to within the required -100 to +100 range, in the first step of the calculation of R, the concept of the true range reappears.

The daily values are added together to form an Accumulated Swing Index (ASI), which substitutes for the price chart, allowing readj identification of the significant highs and lows, as well as clear application of Wilders trading rules.

Terms used in the trading rules are as follows

HSP High swing point-Any day on which the ASI is higher than both the previous and the following day.

LSP Low swingpoint-Any day on which the ASI is lower than both the previous and the following day.

SAR Stop-and-reverse pomts (three tjpes)-Index SAR pomts are generated by the ASI calculation, SAR points apply to a apecific price, and Trailing Index SAR, which lags 60 ASI points behind the best ASI value during a trade.

The Swing Index Sjstem rules are:

1. Initial entry:

a. Enter a new long position when the ASI crosses above the previous HSP

b. Enter a new shon position when the ASI crosses below the previous LSP

2. Settmg the SAR pomt:

a. On entering a new long trade, the SAR is the most recent LSP the SAR is reset to the first LSP following each new HSP A trailing SAR is ddermined as the lowest daily low occurring between the highest HSP and the close of the day on which the ASI dropped 60 points or more.

b. On entering a new short hade, the SAR is the most recent HSP; the SAR is reset to the first HSP following each new LSP The trailing SAR is determined as the highest daily high occurring between the lowest LSP and the close of the day on which the ASI rose by 60 points or more.

Keltners MinorTrend Rule

One of the classic trading sjstems is the Minor Trend Rule published by Keltner in his book How to Make Money in Commodities (The Keltner Statistical Service). It is still followed closely by a great part of the agricultural community and should be understood for its simplicity and potential impact on markets. Sophisticated analjsis musl alwajs remember that a large part of trading activity is the result of straightforward decisions that do not use high technologj.

Keltner defines an upward trend by the faihire to make new lows (comparing todays low with the prior day) and a downtrend by the absence of new highs. This notion is consistent with chart interpretation of trendlines by measuring upward moves along the bottom and downward moves along the tops. The Minor Trend Rule is a plan for using the daily trend as a trading guide. The rule states that the minor trend tums up when the daily trend sells above its most recent high; the minor trend stajs up until the daily trend sells below its most recent low, when it is considered to have tumed down. To trade using the Minor Trend Rule, buj when the minor trend tums up and sell when the minor trend tums down; alwajs reverse the position.

The Minor Trend Rule is a simple, short-term trading tool, bujing on new highs and selling on new lows. It is a breakout method in the stjle of swing trading and can be used



as a leading indicates of the major trend. It requires frequent trading in most markets, with risk varying according to the volatility of the market. Keltners Minor Trend Rule is die basis for a number of current technical sjstems that varj the time period over which prior highs and lows are established and consequently increase the interval between trades and the risk of each trade. An advantage of the Keltner approach is that it imposes no arbitrarj reshictions on the analjsis of prices (e.g., breakouts of 100 points).

Donchians Four-Week Rule

In the mid-1970s. Playboys Investment Guide reviewed Donchians Four-Week Rule as "childishly simple ... was recently discovered to rank premiere among a dozen widely followed mechanical techniques." And the rules are simple:

1. Go long (and cover shorts) when the current price exceeds the highs of the previous 4 full calendar weeks.

2. Go short (and liquidate longs) when the current price fails below the lows of the previous 4 full calendai weeks.

3. Roll forward if necessary into the next contract on the last day of the month preceding expiration.

In 1970, The Traders Note Book (Dunn and Hargitt Financial Services), rated the FourWeek Rule as the best of the popular sjstems of the day. Based on 16 years of history, the best performers were December wheat, June cattle, May copper, August bellies, January soybean oil, and May potatoes.

The sjstem satisfies the basic concepts of trading with the trend, limiting losses and following well-defined rules, it bears a great resemblance to the principle of Keltners Minor Trend Rule, modified to avoid trading too often. Over the years this technique, classified as a slow breakout sjstem, has shown the greatest longevitj. The sjstem is so simple that the only comments about it must also be simple: can a Four-Week Rule work for all markets? If price volatility increases dramatically, the high and low for a 4-week period could become astronomical, while at the same time lower prices could cause narrow ranges in another market. That characteristic is both a key to its success and a problem for risk control. The sohition may be a price levelmodified rule (called adaptive) that reduces the number of weeks (or dajs) in the Irigh-low measured period as prices and volatility increase. A change of this sort would keep risk on a more even level but still relate to the basic volatility principle of the original sjstem. This approach is discussed in Chapter 17 ("Adaptive Techniques").

Modified for the Final Three Months

One sjstem based on the Four-Week Rule uses only the last 3 months of each futures contract. Beginning 3 months before the delivery month, plot the highs and lows according to the Four-Week Rule. For example, trading December silver, start on September I and plot for 4 weeks. The first time the market price crosses the hi or low of that 4-week period, take the appropriate long or short position and place a stop-loss of 2 1/2 .o of the entrj price. If no! stopped out, liquidate the position on the last day of the month prior to delivery. If stopped out, reenter a new position using the high and low established during the original 4 weeks.

The theory behind the modification is that breakouts are more valid and larger in the period just prior to delivery. An advantage of the sjstem is that it trades very litUe and has a low commission burden. The disadvantage is that the stop-loss counteracts the nature of the breakout sjstem and imposes an artificial rid; level on a method thai uses highs and lows established by the market itself. This feature is likely to harm the robustness of the concept.

The N-Day Rule

Computers have allowed us to take many simple ideas and examine them in great detail, sometimes to excess One of the earliest applications of computer power was to change the Four-Week Rule into the N-Day Rule, the predecessor of the n-minute and n-tick rules. The rationale seems logical. If the Four-Week Rule works but the equity drawdown is too large, shortening the time period should improve results.

The N-Day Rule states that a buy signal occurs when the current price exceeds the highest price of the past N dajs; a sell signal occurs when the current price fails below the lowest price of the past N dajs. The determination of N



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