RELATED TOPICS --> | How to use SwingTrader | Timing the JSE the PowerStocks Way |
                               | Anatomy of a real live SwingTrade |

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 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.

HEALTH WARNING : Whilst most of our 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. 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!

If you recall, we offer long-term (multi-year) investment timing signals with our SuperModel Timing System, and we offer medium-term (multi-month) timing signals with the JSE SwissClock and Bullish Percentage Index timing models.  SwingTrader is a short-term (multi-week and sometimes multi-day) timing signal.

Overlaying all the three above timing signal categories, we have TroughFinder (for picking troughs and correction reversals) and PeakFinder (warning of high-risk periods of approaching market tops.)

When vested in long-term or medium-term timing strategies, then the timing signals of those strategies are followed for entry (and exit) into the JSE. However followers of these strategies also use TroughFinder signals to "buy on the dips" and "load up" their existing share portfolios during the course of a long or medium-term bull market (which experiences many troughs on the way up.)

Short-term traders always use TroughFinder signals as market entry-signals of choice, but SwingTrader can generate slightly more entry signals than TroughFinder, so often both TroughFinder and SwingTrader entry signals are used for JSE entry. SwingTrader offers entry and exit timing signals for a trade, whereas TroughFinder only provides entry signals. TroughFinder entries are earlier and generally more accurate and profitable than any other systems we know.

PeakFinder on the other hand, is used by all as when this system fires a signal, we are entering a very high-risk period during which the probabilities of a major correction are very high. It doesn't matter what your investment horizon is with this signal system. Quite often our long and medium term timing strategies will already be out the market or will be firing warning signals in tandem with PeakFinder. But not always - this is why you need to take heed of this signal at all times.

Whereas our long and medium term trading strategies can sometimes sit for months or even years "out the market" (in the safety of bank accounts or money markets), SwingTrader only requires volatility to operate best and as such is used in bear markets and bull markets to offer all-year round trading capability.

The first version of SwingTrader uses multiple modules to generate signals. As our research evolves we will add other modules. They are the Swenlin Trading Oscillator (STO), The McClellan 10-day divergence and the PowerStocks Trading Oscillator (PTO).

ST MODULE-1 : The Swenlin Trading Oscillator (STO) 
This is a 5-day simple moving average of a 4-day exponential moving average of the daily advances minus declines divided by the total daily advances and declines times 100. 

STO = SMA(5) of EMA(4) of (A-D)/(A+D)*100

The double smoothing of the short-term data results in a reliable oscillator that persists in one direction before reaching trading range extremes. It usually tops near short term market tops, and bottoms near short-term market bottoms. 

As with most trading indicators the primary trend of the market will determine how you will use the indicator. In a bull market, STO tops will not be as reliable. In a bear market STO bottoms will not be as reliable.

Divergences between the STO and the price index will often precede changes in trend. Such inconsistencies are warnings that the price trend is not fully supported by breadth. Unlike most indicators, the STO is quite prolific with divergences which makes it quite useful and hence its inclusion in our JBAR report and an input feed to PeakFinder.

For the last 13 years, the STO has moved between extremes of -45 (oversold) and + 35 (overbought) on the JSE. The STO for the last two years is shown below to give you and idea of its movement. The horizontal lines represent increments of 10 and the red line is zero. Five occurrences of bearish divergence and two (#'s 5 and 6) of bullish divergence are shown.

For short term trading, the trade 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, in fact it can be accused of getting skittish too soon and selling prematurely. 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.

ST MODULE-2 : The PowerStocks Trading Oscillator (PTO) 
This is the "big boss of short-term trading signals" in the PowerStocks stable. It is based on our proprietary research of AD-Line and ALSH divergence. It is a specially smoothed version of the AD-Line/ALSH normalised divergence discussed in our Disparity Index Research.

In the last 180 days it seems to have offered far more reliable peak and trough pinpointing accuracy than the Swenlin Trading Oscillator, but has not yet stood the test of time that STO has. Until we back-test the PTO going back a full 12 years (in progress), PeakFinder will be using both STO and PTO as reference  signals for our subscribers to compare against.

The trading method we use it to enter a trade whichever fires first and then exit 30% of our trade when Swenlin fires a SELL and the balance when PTO or McClellan Divergence fires a sell.

Some PowerStocks researchers and founders have been using PTO exclusively to trade with Satrix-40 and Satrix-RESI SSF's and knock-out TOPI warrants very successfully for the last 5 months. The PTO trading signal is shown below for the last 180 trading days, and as you can see it offers remarkable peak and trough identification that resulted in exceptional leveraged short term trade success.

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). There were only a few premature or unprofitable signals. The value of the PTO signal is irrelevant, what matters is its direction and movement.

The trading concept is inverted to the STO. SELL signals are when the PTO turns up from below and BUY signals are when it turns down from above. PTO BUY signals are 1-3 days after most TroughFinder signals. That is why SwingTrader always uses TroughFinder signals to generate JSE entry signals. In the rare case PTO should signal a BUY in the absence of a TroughFinder signal then we use the PTO BUY signal. 

Note in above chart how Swenlin got the jitters and bailed early on the last surge but PTO hung in there right till the top.

ST MODULE-3 : The McClellan 10-day Divergence (M10D) 
This trading line is plotted on the McClellan Disparity Indexed charts in JBAR and WJP. It seems to offer more delayed trough identification than PTO but earlier peak identification. An example is below and you can see that M10D, whilst not as premature in exiting than Swenlin, it certainly showed a signal before PTO. Sometimes M10D gives the better exit signal as PTO typically signals SELL when the JSE tips over the peak, but so far our research has shown that the loss we experience on the PTO "tip-over" is far less than the gains missed by M10D by getting out early.

But when the "tip-over" is very steep, and considering you can only act on the signal the following day which may be another steep down day, it is prudent to perhaps exit 30 to 40% of your position when M10D fires a SELL as chances are you would have banked healthy profits by then any ways so there is no harm locking them in.

You can see above that M10D spikes nicely on its peaks signalling JSE troughs but can "flip-flop" sometimes when trying to trough (signalling a JSE peak).

To summarise, 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%.

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 13 trading days, or an average of 10 trading days. Average ALSH gains for winning trades were 4.1% and average losses were 0.7% With a 75% win rate and gains 5.85 times losses, even hardcore gamblers or poker players will tell you those are "darn good odds."

Super-size Performance with leverage
As you can see, the returns per trade are small when one looks at the ALSH index, 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 "TOPSK % GROW" column in the above picture.

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 8 SwingTrader signals. The first 4 trades were done with the TOPSKA warrant and the following  two were done with the TOPSKB warrant that was listed on the JSE on 23 September. The last two were done with TOPSKC warrants. 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
6th Oct 2009 trade you would have bought TOPSKB's on  the SwingTrader(PTO) signal would have arrived on HeadsUP! the previous evening for 34c and as at the last trade day depicted in the table (27th Oct 2009) they closed at 61c representing a 79.4% gain in 23 days against the ALSH's 7.5% gain during that period (an average gearing ratio of 10.5x). 

Let's distil that table into layman's terms : Over a period of 5.7 months, you would have executed 8 trades, 6 of which were a success (75% success rate). Your average elapsed time vested in the JSE during these trades was 14 days (including weekends) whilst the average waiting period between trades was 10 days. Your average gain per trade was 29% and your funds would have appreciated by 475% over the total period, which represents a compound annual growth rate of 3,799%. 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)

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 exersising extreme caution.

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.

RELATED TOPICS --> | How to use SwingTrader | Timing the JSE the PowerStocks Way
                               | Anatomy of a real live SwingTrade |
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