Putting the Probabilities On Your Side II

Yesterday I introduced the Barros Swings. Today I’ll be considering their construction and the ramifications of their use.

If you want to know how to construct the swings, go to the ‘Free Stuff’ section. There you will find a video showing the basics.

Let’s now turn to their use.

Barros Swings are filter moves of a certain time magnitude. For example, the 18-day measures the monthly trend. 18-day swings will ignore swings of a lesser magnitude e.g. the weekly trend swings (5-day). Because we are measuring magnitudes of time, there is a time relationship between the swings that hold constant. We cannot say the same for other technical indicators. Moreover, the swings automatically adjust depending on the type of trend in progress. For example, if the move is a parabolic move up, it will take a greater retracement to turn the line than would be the case where the trend is in congestion.

Secondly, Barros Swings users have a clear idea of where the current structure of a time frame begins: from the most recent swing extreme of the first higher time frame. In chart 1, I have drawn the 18-day (red) and 5-day swings. The latest 18-day swing begins from Oct 17 2008 because that was 13-week swing low. The latest 5-day structure begins from Dec 18 2008 because that was the latest 18-day swing high. Knowing where a structure begins makes it far easier to determine what retracements are in operation.

Thirdly, Barros Swings allow us to create statistical time and price windows. For example in Figure 1, we can define an 18-day ‘retracement time and price’ window that overlaps the 5-day ‘impulse time and price’ window where the current down move may end.

Knowing where a higher time frame correction may terminate affords some protection from a false change in trend signal of the type shown in yesterday’s ‘failed H&S’.

Finally unlike most of the other technical indicators, Barros Swings provide a clear reference point that defines the end of a trend. In Figure 1, the 18-day uptrend will end once we breach the October 17 low at 112.53. Moreover once the 13-week line turns down, there is a high probability that the 18-day trend will have turned down. So, if the line change price occurs above 112.53, this gives us a heads up that the 18-day trend will change from up to down. In short, Barros Swings clearly distinguish between corrections and changes in trend.Tomorrow I’ll compare the Barros Swings against more traditional trending tools in an analysis of the S&P.

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FIGURE 1 18-day & 5-day 30-Year Bonds

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