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SwingTrader-3 (ST3) is the next-generation quantitative swing-trading timer for the JSE ALSH index from PowerStocks Labs. It supersedes our original SwingTrader product which has been discontinued. We have been offering SwingTrade timing for 8 months now and took extensive feedback and requests from our subscribers to build a far superior system.
SwingTrader-III cames standard with a PowerStocks PRO subscription and is intended as an introductory product for beginner swing-traders for long-only trades. We also offer under a seperate contract (R850 per month in addition to your PowerStocks subscription) the SwingTrader ULTRA which is a far more powerful and sophisticated LIVE system that plays longs and shorts.
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 index futures, warrants, CFD's 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 to effect your trades 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!
At PowerStocks, swing-trading refers to short-term, active trading with average trades lasting from 5 to 20 days and periods of up to 10 days between trades. Gains on a typical trade can average 5-10% with occasional larger gains over 20%. It is not uncommon for us to have open trades for a few months if we have latched onto a strong upward trend. Our swing-trading style is characterised more according to the Turtle trend-following methodologies. It is not "day trading" and it is not "scalping".
ST3 provides significant enhancements over our original SwingTrading system including but not limited to the following:
1. More accurate and unsubjective entries and exits
2. Better trade performance and higher trade frequencies
3. Built-in bear-market protection and "safe-to-trade" indicator (TradeSAFE)
4. Purpose-built JBAR timing chart that is easy and simple to understand
5. Risk (losses) limited to 3% per trade, but gains limited only to the length of the trend
6. Rigorous back-testing and research from PowerStocks Labs
7. Limited 3% downside allows for appropriate trade position-sizing
8. Entries and exits can be clearly forecast ahead without waiting for our alerts
9. Experienced subscribers can use it for shorting purposes on the down-legs.
ST3 has been purpose-built to time swings in direction in the JSE ALSH index. To trade signals from ST3 you therefore need to deploy trades in instruments that track the ALSH index or the JSE TOP40. You can do this by buying SATRIX40 ETF shares (straight share purchase with no gearing) or any ETF's that track the JSE TOP40. Alternatively, you can deploy geared instruments such as TOPI warrants (warrants on the TOP40), SAFEX ALSI index futures (now offered by Standard Bank) or CFD and SSF contracts of the SATRIX40. To spice up your trades you can even deploy instruments that track the RESOURCES-20 index which has a high correlation of movement to the JSE and higher volatility to offer better returns. You could also trade the 8 largest shares on the JSE (BTI,BIL,AGL,MTN,SAB,AMS,SOL,SBK) since these dominate the TOP-40 and are likely to have a high correlation to its movements, but results could be a little less predictable.
THEORY OF OPERATION
ST3 is a true quantitative swing-trading system in that it attempts to find turning points in the ALSH index using daily price movements and momentum. It uses no breadth data in the computation of the swings and as such is one of only two non-breadth systems deployed by us. The TradeSAFE mechanism used by ST3 to avoid bear markets does however deploy extensive breadth theory in its operation, so technically ST3 is a hybrid swing-trading system.
A trade starts with ST3 determining that during a recent downward trend, the JSE has risen a certain % above the all-time low in the current down-leg. The % used depends on volatility measured by the Average True Range (ATR) for the day. When the % rise has been exceeded, the swing-trade is opened and remains open until the JSE drops a certain % below the all-time high measured in the new up-leg. An initial stop-loss of 3% is pre-configured into every trade to limit losses. This allows us to assume a maximum risk of loss of 3% for each trade and size our position accordingly using the PowerStocks Trade Risk Calculator (email us if if you are a subscriber and would like a copy.)
A sample recent ST3 trade chart that appears in JBAR is shown below:
When we are out the market, the JSE is normally falling and we wait until the JSE rises above the red line before we open a swing-trade. Just like a trailing stop-loss, the red line is a trailing "stop-open" and will normally keep falling with the JSE as it marks new lows. It is in effect "keeping us out the market". But one day the JSE will rise up and cross the red line signalling to us a high probability of a "swing" or "reversal". When this happens, the red line will disappear and our attention switches to a new green line which is our trailing "stop loss" that limits our losses to no more than 3% and locks in profits. Whilst the red line can move up and down, the green line can only ever move up, ensuring we continually "lock in" profits in the trade. When the JSE falls below the green line we get out the trade and start the whole process over again. Simplicity you would expect from PowerStocks isn't it?
OTHER REDEEMING FEATURES
Early entries and exits : During open trades, the trading chart will show you how many pts or by how much % the ALSH index needs to fall before it triggers an exit (sell signal.) This is shown in the "Distance to SELL=" section. In the above example, we would know that if the JSE falls by 0.9% the following day we must get out. Similarly when we are out the market this line will show how many points or % the JSE must rise to trigger a trade open. This allows you to configure your exits and entries without having to wait for a signal alert from us. This can significantly boost your returns as it means you can trade "just before the close" which can often add 0.5% to 1.5% to your whole trade as opposed to waiting the next day to execute your trade. Early warning of entries and exits has been a continued request from subscribers and we are pleased to have been able to provide this without relying on our HeadsUP! Pre-Close alerts.
TradeSAFE : There is also an indicator demarcated by the "Trading is now SAFE" information line. ST3 will only allow trades when the market is trending nicely. When our HT-1 trading system is shorting the market, ST3 will flash a warning that "Trading is now DANGEROUS" and you are advised to avoid trading. Whilst it is possible to make some nice swing-trades in a bearish market, when the JSE tries to recover (trading the bear traps), the incorporation of this safety feature raises ST3 win rates from 48.4% to 62.7% and almost doubles its gain/loss ratio from 2.23:1 to 4:16. Trading in bear markets is just far less successful than trading in bull markets.
In the last trade on the right of the sample chart, you will notice that a trade was not opened even though the JSE rose above the red line. At this point in time HT-1 was shorting the market and the DANGEROUS indicator was flashing and so ST3 refused to open the trade. Only when HT-1 covered its short trades 3 days later, did ST3 open its trade.
ST3 is a rapid-fire system quite unlike the quiet, gentle high-confidence systems you have been used to from PowerStocks in the past. The more signals the less win rates - its an unavoidable fact of trading life. However its not all about what % of trades are winners as we show below.
ST3 is our most rapid timer, generating over 120 signals with a 48.4% win-rate in the last 12 years, almost three times as many trades as most of our other systems, and certainly with far less reliability than we have been used to in the past. With the TradeSAFE feature on, this reduces to 75 trades and its win-rate rises to a more respectable 62.7% This may not sound attractive, but remember that the losers were limited by our initial stop-loss of 3% (in fact the average loss was 2.8%) whilst the average gains were 7.1%, meaning that as a whole the gain/loss ratio was 4.16:1 This means 4.16 percentage points were gained in the winning trades versus every percentage point lost in the losing trades. This is what makes ST3 a profitable short-term trading endeavour.
The tables below depict performance back-tests done with ST3 on 12 years of historical JSE data:
What makes ST3 different to what we have exposed you to in the past is that you are going to have to live with about 37% of your trades being losers. You will have to configure your trades on-the-open with a 3% stop-loss and get out the trade if that stop is breached no matter what. This requires a little bit of experience and discipline and certainly the right psychology to stomach a string of small losses, sometimes in succession, before latching onto a nice fat gain. No pain, no gain. No guts, no glory - but then again - that is SwingTrading!
The tables above show that two hypothetical traders, one using TradeSAFE and the other not, would have arrived at more or less the same result after 12 years, with a TRI of 24-25 (2,300-2,400% gain) if continually re-investing proceeds from previous trades into subsequent trades. However the investor with TradeSAFE OFF would have been invested in the JSE 14% more of the time and suffered many more smaller losses. We would argue the trader that deployed TradeSAFE would have enjoyed far better risk-adjusted returns (and far less ulcers!). As a general rule you are advised to stick to trading with TradeSAFE ON.
The chart below shows when the trades would have been executed over the last 12 years. You can click on it for a much larger version. Use right-click "open in new window/tab" so you don't move away from this page.
Clearly, you can see TradeSAFE keeping us out of bear markets very nicely. One other characteristic you will need to get used to is ST3 issuing a SELL signal and then a few days later issuing a BUY signal again! You may admonish the system for being "inaccurate" but remember this is not investing- its trading and as such we want to lock in gains and minimise risk. This "sell then buy again" quirk is what keeps you out of big losses, and locks in gains - especially with leveraged trades. As Richard Dennis, father of turtle trading methodologies quipped - "If you can't buy on a signal issued 2 days after the same signal issued a SELL then you shouldn't be trading!"
For this reason do not use ST3 for investing purposes. You will be in and out the market unnecessarily. Use one of our longer term timers such as SuperModel or LBYC for investing purposes. For medium-term trading purposes use Hedge Trader HT-1 or SwissClock. For intermediate term purposes uses BITS, STORM and QUANTUM. Only use ST3 if you are willing to sell 3 days later after buying, are willing to buy 3 days later after selling and are prepared to make small losses a part of your trading life. This is not to say however that there are no "longish" trades with ST3 - sometimes we latch onto a nice up-trend and hold it open for months at a time! It's just that the trade durations with ST3 are far less predictable that our other timing systems.
NO GUTS, NO GLORY!
Just in case you look at the previous chart and think "This look easy, what's the big deal with the losses?" have a look at an exploded view of ST3 after TradeSAFE issued the "all clear" after the great 2008 stock market crash:
Whilst TradeSAFE kept us out of temptation during the precipitous slide, the first 10 trades suffered 6 losses! The losses were obviously contained, as we were protected with our 3% initial stop-loss but not many traders would have maintained confidence during these times! Obviously once the volatility of the great crash was over and the bull market started in earnest we started trending nicely and the win ratio went up from 40% to 70% and the trades started getting much longer. This is a characteristic of every crash we have studied when back-testing ST3.
The last "big" bear market before 2008, namely 2001, was a little kinder to us (TradeSAFE ON)
Note how TradeSAFE kept us out the markets for close on 12 months (May 2002 to May 2003), then presented us with two small losing trades and after that we latched onto some really nice wins all the way through to February 2004 when we had another correction.
Similarly, the bear market (quite a brutal one we might add) of 1998 (TradeSAFE ON)
In this instance, traders who ignored TradeSAFE would have made a nice 10% profit in that large bear trap, but losses would have mounted after that. In this instance we had one small losing trade and then we latched onto the trends nicely - very nicely in fact.
And just in case you were wondering what happens when TradeSAFE is turned OFF, have a look at the great 2008 crash again below. Two losses, 2 wins and then 8 back-to-back losses on the way down - OUCH! Thanks, but no thanks - we will trade with TradeSAFE ON thank you very much.
As a summary, when a bull market commences, you can expect small losses, sometimes a string of up to 2 or 3 in a row before you "latch" onto the nice long up-trends. It is unavoidable and can even occur during a bull market. We like to think of it like a fisherman - you cast your line out and either lose the fish while you are reeling it in or lose your bait, but after a few tries you make the big catch. You only lose a hook, your time, your patience and maybe some bait in the process but in the end the catch makes it worthwhile.
The table below shows the 75 trades executed:
We note that the initial stop-loss contains our losses to an average 2.8% Sometimes a really big drop shoots past our initial stop loss and we make a larger loss, such as the -7% on 15 Oct 2008, but these are very rare occasions (this is called slippage, which you can budget for in the PowerStocks Trade Risk Calculator.) In strong bull markets, the wins are characterised by strings of successive wins such as the 8 straight back-to-back wins from 2004 to 2006 and the 6 back-to-back wins from late 2006 to mid 2007. But sometimes you can encounter up to 3 back-to-back small losses as the trends do not turn into your favour. Remember to think like the fisherman!
Note how there is a large deviation in the number of days we keep trades open - anything from 1 to 107 days! The average holding period is 31 days but the standard deviation is 25 days. So one cannot categorise this as short term trading really - its more a fast trend following system.
The positive gains can range widely, but many times they clocked over 10% and even reached 33% on one occasion. The chart below gives us a better idea of the distribution of gains:
The positive expectancy of ST-3 is clearly visible with positive gains skewed toward to the right part of the distribution curve. Inclusive of losses, the expectancy of ST-3 is 3.5% With leveraged trades, (with gearing), you would really have been smiling.
With time, you can make a lot of money with SwingTrader. It is ironic that we say you need time to make money with SwingTrader - it sounds just like investing, and not trading! But apart from being fun and keeping you in tune with market sentiment, SwingTrading can be 10 times more profitable than investing if followed methodically with proper position sizing, use of leverage and execution of risk management. Remember, we advocate a JSE style of investing AND trading, as described in "Timing the JSE for profit - the PowerStocks Way"
SHORTING THE MARKET
You can short the market (make a trade that bets the JSE is going to decline) when ST3 is "out" the market. We believe shorting does not offer as good risk-adjusted returns as going long. With shorting your losses are theoretically unlimited whereas with going long your losses are limited to losing all your capital.
Also, it takes a brave soul to short in a bull market as technically you are betting against the trend. Just as we advocate only trading/investing in bull markets, we only advocate shorting in bear markets. We recommend you stick to shorting the JSE only when the TradeSAFE indicator goes to DANGEROUS. Essentially you are shorting the market the same time as our Hedge Trader HT-1 system. It is the only system we have found so far that is reliable enough to short with and even then it only has a 66% success rate.
If you shorted the market every time ST-3 closed its long trades, then as the distribution of JSE gains during these periods show in the table below, your average expectancy is only -0.3% (or your gains on the shorts would average 0.3%). In the chart below, negative gains on the JSE (below zero) would have resulted in short-trade profits and positive gains on the JSE (above zero) would have been short-trade losses.
Although there were some pretty profitable short trades shown on the left of the distribution curve (where the JSE banked some hefty losses) the curve is skewed to the right (positive JSE gains) which means this would not be a very profitable strategy. The fact of the matter is, over 75 of the large profitable short-trades represented in the left of the distribution chart originated from protracted bear markets which Hedge Trader HT-1 would have been shorting. So if you just followed short trades with HT-1 you would capture most of the large short-trade gains without having to endure the positive distribution bias shown in the right of the chart.
The lesson is clear : Only short when HT-1 shorts and when TradeSAFE says its DANGEROUS to trade.
WAIT YOUR TURN
As we stated, ST-3 belongs to the trend-following family of quantitative timing models. These systems never identify absolute peaks and troughs as they typically require a bit of a up-tick (confirming the new up-trend) before climbing in and a bit of a sell-off (confirming the new down-trend) before they get out. This is depicted in the chart below:
There is obviously a gain sacrifice on both the entry and the exit. Now ST-3 limits these sacrifices due to its fast-timing nature but that also means its gains or expectancy is lower than slower timing models. What this means is that you need to get into and out of the trades as soon as possible. If you are faced with a situation where the ST-3 chart is showing us "IN" the market and you have not traded yet, then you face a risk if you enter a trade midway through. This is because the "sacrifice" that will be made when we eventually exit (which will be about 3-5% on average) may very well exceed the gains you have made thus far since your late entry, thus resulting in an unfortunate loss (but one that at least will be limited to around 3%). In this instance you may want to wait for the next signal before trading.
Use the average expected historical gain of ST-3 of 7% as your guide. If the current trade has made gains of more than 5% so far we advise staying away and waiting for the next signal to start. This should only happen to you if you are a new subscriber or trader, and it will only happen once. After that you are "in the system" and trading signals from the beginning.
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