Sunday, January 9, 2011

USDX: Swing Chart

Traders have their personal styles on how to manage trades.The execution and subsequent strategy of maintaining a position is when a trader's personality enters the picture--either for good (profit) or bad (loss)--it is usually bad thing!!!!! Using a swing chart is an effective method of monitoring a trend and may be of use in eliminating emotional baggage from trading strategies.

  • Any 2 consecutive days of higher or lower closes initiates the conditions for a swing to be formed.( 2 green candles or 2 red candles.)
  • Any major swing on a daily chart must be at least 6 days in duration: i.e a new high or low in the direction of the active swing is not made..
  • Once those conditions are met, a major swing is being formed.
  • If only the first condition is met--i.e. the rally or decline is equal to or less than 5 days (shorter than 6) then it is considered a minor swing and is marked by a lower case letter.
  • If both conditions are met, then a upper case letter is assigned to the peak or trough since it is considered a major swing.
  • Note the 3 days following the June 7th 2010 high. Three consecutive lower days Then the decline lasted more than 5 days--suggesting a significant decline was commencing.

The major swing points make ideal trade entry levels and provide strategic stop loss levels to protect profits and assist in keeping with the trend. The USDX generated a buy on November 15th by closing above Point F. Note that the SPX made a short term low a day later. The S&P made a low November 30th coincident with Point H which represents the highest point reached since the November 4th low. (S&P made a high a day later on November 5th) On Friday the USDX closed above Point I--generating another BUY SIGNAL. A close above 81.44 would generate yet another BUY SIGNAL since it is Point H. The correlation between the USDX and SPX suggests that if the USDX continues to advance there is a strong probability that the SPX will commence a significant decline.

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