BACKGROUND MATERIAL --> | Timing the JSE the PowerStocks Way | SwingTrader Product Page |
                                          | Anatomy of a real live SwingTrade |

This section covers the more practical aspects of swing-trading successfully with SwingTrader. For an overview of SwingTrader read the SwingTrader product page. For an explanation of how Swing-trading should fit into your overall investment philosophy read "Timing the JSE the PowerStocks Way". Once you have read these you can progress onto the advice below. When you are done, follow a blow-by-blow account of the last SwingTrader signal in the "Anatomy of a SwingTrade" link above.

HEALTH WARNING : Whilst most of our older subscribers successfully bank large profits with SwingTrader you should note that short-term trading, especially that in geared instruments such as warrants and SSF's should only be attempted by experienced traders. There is a reason we used Las Vegas as our page banner! Read all our trade techniques and guidance offered on this and other pages carefully and repeatedly. Ensure you understand how the underlying instruments you will be using (CFD's , SSF's etc) to trade with are structured and ensure you are aware of all the risks involved. Note our standard disclaimer - we offer no guarantees and can accept no responsibility for outcomes of your trades!

Note that this is not meant to be the definitive Wikepedia entry for short term trading techniques, just some things to get you started off.

HOW TO SWING THE JSE
SwingTrader is a short-term trading signal for traders/speculators (as opposed to long-term investors) in the JSE ALSH or TOP-40 index. It is normally used with Exchange Traded Fund (ETF) Single Stock Futures (SSF's) such as the SATRIX40 or SATRIX RESI, or with geared warrants on the TOP40 index, where small gains in the underlying results in large gains in the investment.

Basically any instrument the trader deems will move in tandem with the ALSH index in a highly correlated manner is a candidate for trading with this signal. SwingTrader signals are now loaded into HeadsUP! Alerts and now also appear in the JBAR reports. SwingTrader provides for high-confidence trading but the JSE's small profits (average 3.5% with 3.4% standard deviation) per trade mean it is best suited to leveraged/geared instruments such as CFD's, SSF's,Warrants and ALSI futures contracts. But do not let these small JSE profits fool you, later on below we show how SwingTrader turned R10,000 into R41,300 in 100 days for an astonishing 15,132% compound annual growth rate.

SWINGTRADER MODULES
SwingTrader consists of 3 modules, The PowerStocks Trading Oscillator (PTO), the Swenlin Trading Oscillator (STO) and the McClellan 10-day divergence (M10D).

STO is a decade old trading tool. Signals are generated when the STO turns up from oversold (BUY) and turns down from overbought (SELL). The idea is to enter the trade on the troughs (valleys) of the STO and exit your trades on the peaks. STO has a very short trading window and in a bull market it can issue SELL signals prematurely. That is why we use it as a reference signal and not a main trading signal.

PTO is the "boss of short-term trading signals" in the PowerStocks stable. It is a cutting-edge new generation trading signal based on our proprietary research of AD-Line and ALSH divergence. It is far more accurate than STO. The PTO signal has an inverse relationship to the ALSH index and has troughs representing ALSH peaks (SELL signals) and peaks representing ALSH troughs (BUY signals). The value of the PTO signal is irrelevant, what matters is its direction and movement.

M10D is a trading signal line plotted on the McClellan Disparity Index charts in JBAR and WJP. It seems to offer more delayed trough identification than PTO but earlier peak identification. But it is not as early as STO. It is used exactly as PTO is used. Using M10D in combination with PTO can deliver good risk-adjusted results.

TroughFinder is a purpose-built machine for hunting down stock market bottoms and crash/correction reversals. It excels at this and is very robust. It is our premier choice for entry signals regardless of what ANY of PTO, STO or M10D are telling us. You are advised to read the TroughFinder HOW-TO beginning-to-end before being successful with SwingTrader.

You can get TroughFinder, STO, PTO and M10D signal charts in the JBAR reports downloadable from the JBAR Download Cafe.

MODULE USE
We watch all three modules to confirm each other for peaks and troughs. Our preferred entry signal is TroughFinder, but sometimes STO or PTO or M10D can fire a entry a day or two before TroughFinder (since TroughFinder is quite picky about calling a trough) and we then trade on that. Sometimes TroughFinder doesn't deem the trough high confidence enough, but STO, M10D or PTO will call the smaller troughs. But this is rare, quite often these modules are a day or three or even 4 behind TroughFinder.

Once we are in the trade we watch all three like hawks (as well as keep a cautious eye on any rumblings from PeakFinder). Chances are STO will chicken out first. Use this to heighten your alert and get ready to exit on the next signal from either PTO or M10D or exit 20% of your trade to lock in profit. When M10D or PTO signal you need to act - either by exiting completely or selling a further 40%.

When we are in a major correction signalled by TroughFinder A-signals of strength 5 or more then STOP TRADING. Ignore the indicators as the rule book goes out the window. Watch HeadsUP! closely for our guidance on trough or reversal points. You might sit for months but it doesn't matter.

If PeakFinder is showing warning signals of an overbought market, FORGET ABOUT TRADING unless you are experienced enough to SHORT THE MARKET.

TRADING ACCOUNT
Open a separate trading sub-account for SwingTrader. Don't trade anything else in this account. This will make your tax affairs easier to calculate and allow you to avoid been branded a trader for all your investments by SARS since your trading account is separate to your investing account.

Your broker should let you do this for free. Standard Bank, whom we use, do not charge for this and the account also gets special brokerage discounts which is a big plus.

The separate account will also serve as a history of all your trades and force you not to dip into your investment funds. Carve out a batch of your overall investment funds for trading (10-15%) and write a promisory note to yourself to NEVER TOP IT UP FOR 12 MONTHS. This will force you to trade with only what you have.

Never risk more than 50% of this trading account on a single SwingTrader trade. If you get wiped out by a trade (very unlikely if we follow all our signals and sound risk management but nothing is guaranteed on the stock markets) you have the balance left to get back in and make it up again.


SWINGTRADER PERFORMANCE (PTO VERSION)
If one had to pick a single combination from TroughFinder, STO, PTO and M10D then TroughFinder and PTO are your champions. PTO is remarkable for its ability to time minor peaks and TroughFinder-II is unmatched for picking any troughs of consequence. Using TroughFinder-II signals for trade entries and PTO for trade exits over the last 180 days (6 months) is demonstrated below:



These depict periods when BUY or SELL signals were present. There were 8 trades (one per 22 days) ranging from vested periods of 4 days to 17 days (including weekends) but averaging 14 days. SwingTrader(PTO) was vested 102 days out of the 180 days under review or 56% of the time. Periods the strategy sat "out the market" ranged from 2 to 11 trading days, or an average of 6 trading days.

Assuming you bought the day after a BUY signal was generated, and sold the day after a SELL signal was generated (in order to be realistic) then there would have been 6 positive trades averaging 5.3% with standard deviation of 2.25%(Sharpe=2.35) and 2 negative trades of -3.25% and -0.88% averaging -2%. That is a 75% trade win rate with average gains from winning trades more than double average losses from losing trades. Even a hardcore gambler or Poker player will tell you those are "darn goods odds".

SuperSize Performance with leverage
As you can see, the returns per trade are small, but they are high confidence. For this reason SwingTrader is highly suited to any geared underlying instruments such as warrants, CFD's and SSF's. For example, with highly geared knock-out barrier CALL warrants and their low R50 brokerage charged by Standard Bank per trade (if you open a separate warrants trading sub-account for free) you would have done EXCEPTIONALLY WELL as shown in the below transaction table of trades we conducted on our own accounts while testing SwingTrader. 



We only started trading from July as the first barrier warrants were only launched by Standard Bank then, so in this example we only played the last 5 SwingTrader signals. The first 4 trades were done with the TOPSKA warrant and the last was done with the TOPSKB warrant that was listed on the JSE on 23 September. You can see that as the ALSH progressed higher over time the gearing (GEAR) of TOPSKA returns started falling (less risk but also less gain). That is why we switched to TOPSKB when they were listed as we are obviously seeking the highest gearing possible.

For example, in the last trade depicted you would have bought TOPSKB's on 6th Oct 2009 (the SwingTrader(PTO) signal would have arrived on HeadsUP! the previous evening) for 34c and as at the last day depicted in the table (21st Oct 2009) they closed at 61c representing a 79.4% gain in 15 days against the ALSH's 6.5% gain during that period (an average gearing ratio of 12.3x). 

Similarly for the 2nd last trade depicted, you would have bought TOPSKA's on 7th Sept 2009 for 88c and sold on 22nd Sept for 94c for a 6.8% gain against the ALSHs' gain of 1.7% in that period (a gearing of 3.9x).

Let's distil that table into layman's terms : Over a period of 103 days, you would have executed 5 trades, 4 of which were a success (80% success rate). Your average elapsed time vested in the JSE during these trades was 12 days (including weekends) whilst the average waiting period between trades was 10 days. Your average gain per trade was 38.5% and your funds would have appreciated by 313% over the total period, which represents a compound annual growth rate of 15,132%. In the example above, we only placed R10,000 at risk but were exposed to huge upside!

Hopefully you now understand why in our "Investing the PowerStocks Way" tutorial you can see we only need to allocate 15% of our total investment capital to SwingTrader. Small risk, huge upside.

Look at the chart again. If you really wanted to be aggressive you could buy the knock-out TOPI PUT warrants to short the JSE TOP40 whenever you get a SwingTrader SELL signal. The exact concept described above applies, except the warrant price gains when the ALSH drops and falls when the ALSH rises. The gains are likely to be smaller on the way down though as in a rising bull market the corrections are smaller than the gains between corrections. However in a bear market the shorting strategy with PUT warrants is likely to work better than going long with CALL warrants.

We would urge you to exercise caution with shorting in a bull market as for the 6-month period covered, the average drop in the JSE during the SwingTrader SELL periods was only -0.2% with a wide 2.1% standard deviation (Sharpe = 0.1). Compare this to the average growth during the BUY periods which was 3.5% with a 3.4% standard deviation (Sharpe=1.03)

USING TROUGHFINDER + PEAKFINDER WITH SWINGTRADER
It is recommended the astute trader uses TroughFinder entries in conjunction with SwingTrader PTO/STO entries, whichever comes first. TroughFinder has stood the test of time and research and offers high confidence JSE entry points. If TroughFinder fires a signal the short-term trader should not hesitate to open a trade, and then use SwingTrader to signal his  exit.

Similarly, if the trader should observe an infrequent PeakFinder signal in HeadsUP! they should close their positions regardless of what SwingTrader is telling them or at least start exercising extreme caution.


HEADS-UP! ALERTS
SwingTrader BUY/SELL alerts for both the STO and the PTO modules have been configured into the HeadsUP! alerts system for subscribers. You can also see STO in chart set 8a and PTO in chart set 7a in the regular JBAR reports. SwingTrader analyst commentary now appears in the SwingTrader section of The Weekly JSE Pulse (WJP), published every Monday. 

TRADE TECHNIQUES
When you see an alert DO NOT DAWDLE just get in and make the trade. Do not mess about trying to offer 1c less than the market price, the SwingTrader signal has detected significant up-momentum and chances are very good the instrument you are trading WILL RUN AWAY FROM YOU. Go in AT MARKET to ensure your trade is executed. Look for a instrument that is trading rapidly - don't be the only one trading the instrument that day!

The 1 or 2% you're trying to save on the purchase pales into insignificance versus the lost profits when the share runs away from you - ESPECIALLY with leveraged instruments. Trust us on this one - its the most common mistake with newbies trying to be "clever" on the initial purchase or the sell. When you are long term investing you can mess about like this but remember you are trading not investing. A typical warrant BUY order on Standard Bank appears below as we trade it to ensure the trade goes through quickly:



Set stops to trail large amounts behind your investment otherwise you could get prematurely stopped out. We don't like using stops on geared instruments. Tight stops are for people who are gambling and don't know what to expect. With SwingTrader you are removing most of the risk of further immediate downside from your trade. Watch your trade closely rather for the first few days or set-up your brokerage account to send you alerts of price drops rather than blindly stopping you out. Make your stop 50% just in case some major unforeseen market event wipes you out. Such a large stop shouldn't result in premature ejection.

Watch HeadsUP! religiously and your in-box for HeadsUP alerts. Ensure research@powerstocks.co.za is configured as a SAFE SENDER in your email client to avoid an important alert getting thrown into your JUNK EMAIL box. Read your SwingTrader charts in JBAR every 2nd day to guage your trade.

Play the whole signal. Wait for the peak. If you're too scared to do this then rather go in with a smaller trade and play the whole signal than chicken out early. The only caveat to this is if you are up 50% or more, then you are forgiven for taking profits.

Use phased exits with each module firing a sell signal to lower your risk if you must, but you will need a sizeable trade to make this worth your while as selling off 30% of a R10,000 trade will lead to high brokerage on the R3,000 trade this will result in. If your phase-outs are in chunks of R10,000 you should be OK. If you're going to implement a 2-phaseout then trade with R20,000. With a three phase-out trade with R30,000 etc.

PSYCHOLOGY
Paper-trade the next SwingTrader signal to see how it works and try and assess your psychology during the various phases of the trade. You will be surprised how against-the-grain some SwingTrader signals can be. In hindsight they look obvious, but when they occur you will suffer from "hard right-edge" syndrome - ie the lack to see beyond the day on which you receive the signal coupled with a trade that seems "out of its mind" will work against you making the trade. Its hard to be the first to buy when everything is collapsing around you (FEAR) and its hard to be the first to sell when things are roaring ahead and the market seems invincible (GREED). SwingTrader signal are very intuitive when viewed historically but believe us that on the day they fire they are very "un-obvious"

Once you have done a virtual "paper trade" write down your thoughts after each signal we generate from HEADSUP! Try and produce a post-mortem like we do with every SwingTrade, documenting your thoughts, fears and reasoning for your actions. After a while it will become second nature.

When you have done at least one paper-trade, start your first live trade by using our phasing-in and out risk management methodologies and start off with R2,000 to R5,000. With each success, you can increase your wagers as you accumulate the psychological edge required to start placing large amounts into the market. Don't get greedy and rush in and wager large amounts - there are plenty of signals to go around and SwingTrader opportunities are not going to run away any time soon.

INSTRUMENTS
Warrants, barrier warrants, CFD's or SSF's - which are the best to use? We prefer barrier warrants due to their low costs on our discount warrants sub-account, their high leverage and liquidity and you never lose more than your initial investment (unlike SSF's where margin calls can cripple you if the trade really goes against you.) There is also no time-decay to worry about on barrier warrants.

Remember with barrier warrants, when the knock-out level is reached you lose the whole investment and the trade falls away. By nature of the way SwingTrader is designed, you will be entering the market in troughs - some of them deep. In these cases the barrier warrant will be close to the knock-out level but will compensate with very high gearing. If you are concerned of the gap between the current price and knock-out level then try and find another older knock-out warrant with a lower barrier (but understand the gearing will be much lower.) We've designed SwingTrader to be low risk so we always chase the highest gearing warrant when opening  a trade.

We've dabbled with Satrix40 and Satrix RESI SSF's on some trades but the jury's' out on which method is best. Both warrants and SSF's offer gearing but are implemented differently. Margin calls on SSF' mean your losses are unlimited, but you don't get knocked out when the ALSH goes below a certain limit. The nice thing with SSF's is you can play SATRIX DIVI, RESI and others whereas knock-out barrier warrants are limited to the TOPI TOP40 trade-able. This may be useful, especially as RESI offers far higher volatility than the TOP40.

Standard Bank run an excellent site for warrants education, news and prices. Just go to www.warrants.co.za or www.warrants.standardbank.co.za/warrants/ On that site you should find the page "FIND KNOCKOUT WARRANTS" that shows you what warrants are currently in play:




Choose the one with the lowest gearing if you are conservative and higher gearing if you want to give it horns. Compare the TOPI index price to the Knock-out Level to make sure they are not too close (but remember by default TroughFinder gets you quite close especially after an extended drop in share prices) Since we have a high confidence probability of a rise in prises this should not concern you too much. If the JSE has really fallen hard and you find a warrant that is still far from the knock-out price (at least 10% to 15% for safety margin) and gearing is still greater than 5 times then that is great.

Click here to download the Knock-out Warrants PDF brochure from Standard Bank.

[THIS PARAGRAPH IS WORK IN PROGRESS, IF ANY SUBSCRIBERS HAVE OPINIONS ON WHICH INSTRUMENTS THEY DEEM BEST SEND US AN EMAIL AND IF WE LIKE YOUR EXPLANATION WE WILL INCLUDE IT HERE AND GIVE YOU A FREE MONTH ADDED ONTO YOUR CONTRACT ]

COSTS
With our discount warrants/futures sub-account with Standard Bank, the SSF trades are R68 a piece, slightly more than the R50 we pay per trade with TOPSK warrants. This is very cost effective and means you can trade in chunks of R5,000 without brokerage sapping more than 2% of your profits at the end of the trade (1% in and 1% to get out).

We recommend R10,000 minimum trades (so your getting-in brokerage is only 0.5%) and this allows you two phase-out exits where brokerage will be maximum of 1% of each trade. So 1 entry (costing R50) and two exits (costing R50 x 2 = R100) means brokerage is total of R150. On R10,000 this limits brokerage to 1.5%

REAL LIFE EXAMPLE
Let's go through a real-life trade, the last SwingTrader signal as implemented by us on our own brokerage accounts. We have documented a chronology of events for the last trade together with some of our psychology and thinking and use of various JBAR reports during the trade life-cycle at the "Anatomy of a SwingTrade" link in the menu bar at the top and bottom of this page.

HEALTH WARNING : Whilst most of our older subscribers successfully bank large profits with SwingTrader you should note that short-term trading, especially that in geared instruments such as warrants and SSF's should only be attempted by experienced traders. There is a reason we used Las Vegas as our page banner! Read all our trade techniques and guidance offered on this and other pages carefully and repeatedly. Ensure you understand how the underlying instruments you will be using (CFD's , SSF's etc) to trade with are structured and ensure you are aware of all the risks involved. Note our standard disclaimer - we offer no guarantees and can accept no responsibility for outcomes of your trades!



BACKGROUND MATERIAL --> | Timing the JSE the PowerStocks Way | SwingTrader Product Page |
                                          |
Anatomy of a real live SwingTrade |

 
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