Swinging with the swing indicator. In this post I thought I would highlight an indicator I often use. The swing indicator. Basically it shows when the price moves out of a price range (up or down) based upon its look back period. This is primarily used in the break out trade type strategy. This is one of three basic trade types that we often discuss in the Trade Plan strategy design.

The swing indicator can be used on any type of chart, but I have chosen to use this with a point and figure – 10 tick reversal chart. The swing strength values are 10 to 20, depending on the volatility of the instrument. You will want to optimize this value to suit your instrument’s price action. The trade set up is as follows:

Trigger: The first higher low or lower high that is below the directional swing point – take the trade in the direction of the break out.

Profit target and stops: 2 to 1 ratio. In oil for example 60 tick profit target and a 30 tick stop. In Euro its 40 and 20. But this may need some optimization.

Filter: Any wide swing areas avoid. It there is more than 100 ticks between the upper and lower swing lines - avoid the trade. But this may need some optimization.

Order management: Use a scale out strategy – starting with 2 contract positions. First contract profit target is 1/2 the identified profit target. Once the first contract rip occurs, move stop of the 2nd contract to just above break even.

See the thumbnail chart for examples of the possible out comes and an idea how the strategy should look on your chart. A word of caution on point and figure charts. They are deceiving as the next bar paints only after the 10 tick reversal occurs. So part of this bar gets painted in hindsight and can not be used to trade.

Win / Loss ratio: With the order management strategy identified here in this Trade Plan the following are the percentage outcomes breakdown (as tested on my Ninja automated back tests):

• 35% 1st contract winners of 1/2 the profit target
• 35% 1st contract losers of 1/2 the profit target
• 15% 2nd contract break even
• 15% 2nd contract winners at the profit target

When testing this strategy on a variety of instruments these percentage held fairly close through several months of back test data. You notice that you really only win 15% of the time the rest are break even to net “0.” Wild chop (not minor chop) is the enemy of this strategy, so only use when you have volatile markets. If you reverse the trade and use a counter trend strategy starting at the profit target point and do the Trade Plan in reverse – you get similar results. Hence the break out trade type is very similar to the counter trend trade type. This issue then becomes chop vs. trend. Give this a try and let me know how you do.