Swing Trading Using MA & RSI

[CubedSol]

Defining Swing Trading

A style of trading that attempts to capture gains in a stock within one to four days. Swing traders use technical analysis to look for stocks with short-term price momentum. These traders aren't interested in the fundamental or intrinsic value of stocks, but rather in their price trends and patterns. A swing trading position is typically held longer than a day, but shorter than trend following trades or buy and hold investment strategies that can be held for weeks or months. Profits can be sought by engaging in either Long or Short trading.

What one Needs to become a Swing Trader?

There are two types of Swing traders in the market. The first type will be successful, making money regularly from the markets, while the second type will consistently lose money until they finally give up on trading. The problem with this business is that majority of traders will fall in the latter category. This brings us to the dilemma of understanding what it requires to be a Swing trader. I would not like to repeat things on money management and psychology and hence instead of writing a lot, I will summarize by writing a few points about it. In my opinion, the most important aspects of being a Swing trader are,

Discipline
Responsibility of trades
Being an Optimist
Understanding of Risk
Flexibility
Willingness to Succeed

My Five Commandments to become a successful Swing trader

1. Cut Losses Short - No matter who says what, if a trade is going against you, cut your losses and sit back.

2. Managing Targets & Stop Losses - Always protect your swing profits by shifting your trailing profit on the upside. Revise your targets depending on market situations.

3. Trade the trend - Always trade in the direction of the long term trend. Do not take a trade opposite to the trend.

4. Records - Keep detailed record of every trade and analyze your mistakes on a weekly basis. No matter what stage you reach, learning and improving never ends.

5. Never Average down - Never ever average on the downside. Always average on the upside.

Other Requirements - Usually ignored by many

1. Lowest commissions possible along with the best service one can bargain for.

2. Opting for brokers who provide a Desktop based trading application. Web based applications are slow.

3. Sufficient trading capital to start with. Anything less than 5 Lacs in my opinion is difficult to make a living from.

4. Reliable Internet connection with backup, installed on a high end Desktop/Laptop

5. Using appropriate softwares for Technicals. Web based softwares are just not good to analyze.

6. Making sure that Data is clean and Accurate. Data from some free sites are full of errors and are unvalidated.


In the next section we will start off with the method of identifying Swing trades.

http://www.traderji.com/advanced-traders-strategies/48879-swing-trading-using-ma-rsi.html

[CubedSol]

Moving Averages

To help understand moving averages, it is first necessary to discuss time series, i.e., series of data points that are chronologically ordered. The daily closing prices for a commodity are one example: They form a string of “data points” or “bars” that follow one another in time. In a given series, a sample of consecutive data points may be referred to as a “time window.” If the data points (e.g., closing prices) in a given time window were added together, and the sum divided by the number of data points in the sample, an “average” would result. A moving average is when this averaging process is repeated over and over as the sampling period is advanced, one data point at a time, through the series. The averages themselves form a new time series, a set of values ordered by time. The new series is referred to as “the moving average of the original or underlying time series” (in this case, the moving average of the close). The type of moving average just described is known as a simple moving average, since the average was computed by simply summing the data points in the time window, giving each point equal weight, and then dividing by the number of data points summed.

Using Moving Average

For our Swing Trading Model, we will be using a Simple Moving Average with a Parameter of 50 on a Weekly Time frame. As per your research, this parameter can be adjusted. I have found this Parameter to work well across various asset classes.

Relative Strength Index

Relative Strength Index, introduced by J. Welles Wilder measures the strength of an issue against its history of price change by comparing “up” days to “down” days. Wilder assumed that overbought levels generally occur after market has advanced for a disproportionate number of days and that oversold levels generally follow a significant number of declining days. The RSI can range between 0 to 100 and the most popular parameter used by traders is 14. There have been numerous modifications to the RSI and from what I have researched, nothing beats the original indicator created by Welles Wilder.

Usage of RSI

The most common use of RSI is to trade on the positive side once it breaches 30 on the upside and to trade on the short side once it breaches 80 or 70 on the down side. Now, most of you who have ever traded this indicator, would know that this method works well some times while rest of the times it is not profitable. It leads to more whipsaws and draw downs which cannot be sustained by small trading accounts. Hence, what we will use in this Swing System is slightly different. More of this will be covered in the rules section.

Why Moving Averages and RSI together?

Moving Averages are used to capture trends and to essentially have enter and exit points and RSI is used to measure the strength of the securities price structure. Moving Average techniques will only be applied to those securities whose price structure is strong and hence we would avoid having too many whipsaws. In a nutshell, Strength would be captured by Trend.

How to measure the Price structure through RSI?

This is where the crux of the strategy lies. As mentioned earlier, RSI used traditionally cannot generate returns over the long run and this is precisely why we will be using RSI in a modified manner to measure a securities Strength and Weakness. Credit to identifying this modified use of RSI should go to Andrew Cardwell. My personal contribution remains restricted to integrating the use of RSI with some tweaks to the parameters with Moving Averages on a Weekly time frame. Let us discuss the rules briefly here for the sake of understanding and later on we will revisit rules in detail.

Modified RSI Use,

In Bull Market – RSI remains in the range of 80 – 40 – RSI never goes below 29-33
In Bear Market – RSI remains in the range of 60 – 20 – RSI never goes above 60 – 67

In the next section, let us specify the rules in detail covering all the aspects.

Parameters required by this Model

Weekly Time Frame of the Security
Simple Moving Average with 50 as Parameter
Relative Strength Indicator (15) with levels of 80 & 40 in Green and 60 & 20 in Red
Refer to the chart below for a sample.

[CubedSol]

1. Identifying the Current Market

First step in this model is to identify the current securities strength/weakness. To see that, look at where the RSI is trading. To be more specific, look at the range in which RSI is trading. Whether it is in the Bullish range (80 - 40) or is it in the Bearish range (60 – 20). Visual inspection should instantly tell you whether the stock is Bullish or Bearish. Refer to the chart below. Since April 1930 to April 1932, Dow was trading in a Bearish Zone. How do we know it? Look at the RSI(15) range. It is trading between 60 and 20! Similarly Bullish stocks can be identified.




2. Making a Trading Decision

Once the current market’s structure has been identified, all you have to do is wait for a suitable entry. For entry and exit we will be using a 50 MA or a 20 MA in some specific case. If we see, a Security’s RSI hovering around the 40 level (That is, RSI taking support near 40), we will wait for the price to move above the 50 period average. Once this happens, we will then keep a stop loss of 50 DMA or can use volatility based stop to protect our account. In case of profits, we will let our profits run with suitable trailing stop as we move higher

Similarly, if we spot the RSI taking resistance at 55-63 zone, we will wait for prices to close below 50 MA or 20 MA in order to go short.

Buy – RSI Strength + Price above 50 MA
Short – RSI Weakness + Price below 50 MA

There will be times when trends are so strong that prices won’t retrace back to 50 MA for a suitable entry. In that case we will use 20 MA for entries.

Buy – RSI strength + Price above 20 MA
Short – RSI Weakness + Price below 20 MA

In no case shall we ever Short a market trading above its 50 MA even if RSI is showing weakness. Similarly, in no case shall we ever Buy a stock trading below its 50 MA even if RSI is showing strength.

[smallville]

Here's Some code for Swing system for Amibroker.. Save the code on Formula editor and back test the results; Can't remember where I fund this.. Just taken from ma Ami..

_SECTION_BEGIN("NICK MA Swing");
SetBarsRequired(200,0);

GraphXSpace = 5;
SetChartOptions(0,chartShowArrows|chartShowDates);
k = Optimize("K",Param("K",1,0.25,5,0.25),0.25,5,0.25);
Per= Optimize("atr",Param("atr",4,3,20,1),3,20,1);
HACLOSE=(O+H+L+C)/4;
HaOpen = AMA( Ref( HaClose, -1 ), 0.5 );
HaHigh = Max( H, Max( HaClose, HaOpen ) );
HaLow = Min( L, Min( HaClose, HaOpen ) );
PlotOHLC( HaOpen, HaHigh, HaLow, HaClose, "" + Name(), colorBlack, styleCandle | styleNoLabel );
j=Haclose;

//=======================================================================================================================
//=========================Indicator==============================================================================================
f=ATR(14);

rfsctor = WMA(H-L, Per);

revers = k * rfsctor;

Trend = 1;
NW[0] = 0;


for(i = 1; i < BarCount; i++)
{
if(Trend[i-1] == 1)
{
if(j[i] < NW[i-1])
{
Trend[i] = -1;
NW[i] = j[i] + Revers[i];
}
else
{
Trend[i] = 1;
if((j[i] - Revers[i]) > NW[i-1])
{
NW[i] = j[i] - Revers[i];
}
else
{
NW[i] = NW[i-1];
}
}
}
if(Trend[i-1] == -1)
{
if(j[i] > NW[i-1])
{
Trend[i] = 1;
NW[i] = j[i] - Revers[i];
}
else
{
Trend[i] = -1;
if((j[i] + Revers[i]) < NW[i-1])
{
NW[i] = j[i] + Revers[i];
}
else
{
NW[i] = NW[i-1];
}
}
}
}

//===============system================

Plot(NW, "", IIf(Trend == 1, 27, 4), 4);
Buy=Cover=Cross(j,nw);
Sell=Short=Cross(nw,j);
SellPrice=ValueWhen(Sell,C,1);
BuyPrice=ValueWhen(Buy,C,1);
Long=Flip(Buy,Sell);
Shrt=Flip(Sell,Buy );
_SECTION_END();
//=================TITLE================================================================================================
_SECTION_BEGIN("Title");
if( Status("action") == actionIndicator )
(
Title = EncodeColor(colorWhite)+ "NICK MA Swing System" + " - " + Name() + " - " + EncodeColor(colorRed)+ Interval(2) + EncodeColor(colorWhite) +
" - " + Date() +" - "+"\n" +EncodeColor(colorYellow) +"Op-"+O+" "+"Hi-"+H+" "+"Lo-"+L+" "+
"Cl-"+C+" "+ "Vol= "+ WriteVal(V)+"\n"+
EncodeColor(colorLime)+
WriteIf (Buy , " GO LONG / Reverse Signal at "+C+" ","")+
WriteIf (Sell , " EXIT LONG / Reverse Signal at "+C+" ","")+"\n"+EncodeColor(colorWhite)+
WriteIf(Sell , "Total Profit/Loss for the Last Trade Rs."+(C-BuyPrice)+"","")+
WriteIf(Buy , "Total Profit/Loss for the Last trade Rs."+(SellPrice-C)+"","")+
WriteIf(Long AND NOT Buy, "Trade : Long - Entry price Rs."+(BuyPrice),"")+
WriteIf(shrt AND NOT Sell, "Trade : Short - Entry price Rs."+(SellPrice),"")+"\n"+
WriteIf(Long AND NOT Buy, "Current Profit/Loss Rs."+(C-BuyPrice)+"","")+
WriteIf(shrt AND NOT Sell, "Current Profit/Loss Rs."+(SellPrice-C)+"",""));
PlotShapes(IIf(Buy, shapeSquare, shapeNone),colorGreen, 0, L, Offset=-40);
PlotShapes(IIf(Buy, shapeSquare, shapeNone),colorLime, 0,L, Offset=-50);
PlotShapes(IIf(Buy, shapeUpArrow, shapeNone),colorWhite, 0,L, Offset=-45);
PlotShapes(IIf(Sell, shapeSquare, shapeNone),colorRed, 0, H, Offset=40);
PlotShapes(IIf(Sell, shapeSquare, shapeNone),colorOrange, 0,H, Offset=50);
PlotShapes(IIf(Sell, shapeDownArrow, shapeNone),colorWhite, 0,H, Offset=-45);
_SECTION_END();

[CubedSol]

http://www.wisestocktrader.com/indicators/55-nma-swing-system-v1-1

[madurajithp]

This is Really useful. Some Technique that i'm experimenting. Thanks.

[Paypal]

Thanks CubedSol & smallville

[hunter]

Very good practical stuff!
Thanks for posting.
I need to keep reminding these regularly to myself.

[lokuayya]

good reading,thanks
in practice i have to keep reminding the rules to myself because most of the time we enter at the correct time but do not exit when the stock get weak. I made many mistakes in not following the exit rule.if we argue with the rules or the market trend, it can be very expensive.

[RichDad]

Thanks for sharing the technical lessons CubedSol and smallville. Valuable stuff. Keep up the good work. Positive Reps.

[sas]

thanks CubedSol and smallville for sharing (struggling to understand - tama new ne)

I found this book;
Stock Patterns For Day Trading And Swing Trading - by Barry Rudd
http://www.mediafire.com/?mr0djj0mxlm

I'm still looking for time to read this
If anyone found something valuble in this, plz ref the page no.

[CubedSol]

@sas : Try downloading this and goin thro...It provides you with the basics...and NOT boring

http://forum.srilankaequity.com/t6787-swing-trading-for-dummies-p

[Thor]

Many many many thanks for this. Extremely useful!

[wappula]

Desktop based trading application. Web based applications what is mean of this pls explain me

[CubedSol]

Desktop based trading application. Web based applications what is mean of this pls explain me

Desktop Based : DirectFN TWS / CDAX
Web Based : DirectFN WEB / Other trading platforms provided by brokers that are accesible thro web browsers

Ooopzz.... Guys in this regard I want your feedback , Whats YOUR opinion on this ??

( Considering the connectivity in SL )

[smallville]

Desktop based trading application. Web based applications what is mean of this pls explain me

Desktop Based : DirectFN TWS / CDAX
Web Based : DirectFN WEB / Other trading platforms provided by brokers that are accesible thro web browsers

Ooopzz.... Guys in this regard I want your feedback , Whats YOUR opinion on this ??

( Considering the connectivity in SL )

IE is the base for most of these web trading platforms, DFN web interface could be loaded on Chrome but not sure whether its gonna support their push technology hence keep getting updated or not.
You can use ADSL connectivity for any of this trading facilities, a simple 512Kb connection would do. Also the dongles Mobitel, Dialog, etc.. would work but u have to make sure the 3G is supported in your area, most specifically the place that u access it. Otherwise u may experience a hell of a lag and make losses trading IPOs..

[CubedSol]

Agreed .

[Auther]

Is here any institute to learn about these things..?

[gospelkrayz]

Wonderful Article.. Loved it.. Many Thanks..

[SanjivFund]

Great article cubes..
+rep

[sas]

thanks for the article & help given, +rep

[watch dog]

great work +rep

[chamarahs]

[rmark]

CubedSol,
thank you very much for sharing

[laki]

kk