metaswing user guide3 5

From Northington Trading, LLC Volatility-Based Technical Analysis Framework

User Guide Version 3.5 For MetaStock® 9.1 and higher Stock, FOREX and Options Trading Daily or Intraday Analysis MetaSwing®

Add-On Trading Tools for MetaStock® From Northington Trading, LLC

MetaSwing® Version 3.5

For MetaStock® 9.1 and higher

Stock, FOREX and Options Trading Daily or Intraday Analysis

User Guide

MetaSwing® Version 3.5

2/1/2009

Copyright 2009 Northington Trading, LLC All rights reserved

Northington Trading, LLC

Charlotte, NC 28227

[email protected] http://www.metaswing.com

MetaStock® is a trademark of Equis International, a Thomson Reuters company.

mailto:[email protected]

Disclaimer The risk of loss in trading securities, options, futures and foreign exchange can be substantial. MetaSwing® users and customers must consider all relevant risk factors including their own personal financial situation before trading. Northington Trading, LLC assumes no responsibility for actual trading results based on using MetaSwing® software, or any of its training or support media. MetaSwing® software users and customers must use Metaswing at their own risk. MetaSwing® and MetaStock® do not produce recommendations to buy or sell, but rather guidelines to interpreting their respective analysis methods. This information should only be used by investors who are aware of the risks inherent in securities trading. Northington Trading, LLC accepts no liability whatsoever for any loss arising from any use of these products or their contents. This documentation is designed to instruct you on using MetaStock and MetaSwing and is not a recommendation to buy or sell, but rather guidelines to interpreting and using the specific indicators and features within the software. The information, software, and techniques presented herein should only be used by investors who are aware of the risk inherent in trading. Northington Trading, LLC, shall have no liability for any investment decisions based on the use of their software, any trading strategies or any information provided in connection with the company. Any form of financial trading involves substantial risk of loss.

MetaSwing User Guide

Table of Contents Section 1 About this Manual

Subscriber Daily Report Download Service Section 2 Getting Started

MetaSwing Components list Installation Data requirements & data dependent indicators Daily data update The Liquidity Qualifier Viewing Charts with MetaSwing Templates

Section 3 MetaSwing Indicators N Bands N Band Support & Resistance Oversold and Overbought Trend Strength Key Indicator Slopes

Section 4 Trading with MetaSwing Methods

MetaSwing Trading Philosophy Rules The Liquidity Qualifier MetaSwing Methods

Adeo Long Adeo Long HS 123 Long Exit Short Adeo Short Exit Long Adeo Short LS Compression

System Tests Section 5 MetaSwing Explorations

Method Explorations Subscriber Report Download Service Exploration Code The Liquidity Qualifier

Section 6 Correction Surge System

Data Requirements Correction Signals Surge Signals

Section 7 Market Cycle Identification and Anticipation

Bull / Bear Phase Predictor Introduction Short Term BBPP Examples Intermediate Trend Change

Section 8 MetaSwing FOREX Indicator and Trading Signal Interpretation and Examples

About This Manual MetaSwing User Guide

Thank You Thank you for using MetaSwing®. You have a great opportunity to trade with a structured and volatility-based approach to the markets. Now there’s machete in your hand that can cut through the incredible random jungle that are the financial markets. MetaSwing gives you the individual trader some of the power tools that large institutional traders have. Support and resistance that was previously hidden from you is now yours. High probability reversals are now yours to choose from. All important broad market timing tools are yours to rely on.

About this Manual This user guide is the ‘how to’ for the MetaSwing trading system. However it’s much more than just explanations and instructions. This guide is a compilation of the methods of utilizing its unique strengths which are built on the power of MetaStock. It will show you in real world examples how specific indicators and trade methods coincide to produce profitable trades. Real MetaSwing charts are presented as examples throughout. MetaSwing is primarily a discretionary trading system. Be sure to read the Indicators and MetaSwing Methods sections closely. If your approach to MetaSwing is to use only pieces of the system to augment your existing trading style or system then that’s fine. We are glad you chose us to help. However if you are looking for a complete trading system to follow then we strongly recommend reading each section of this manual at least once thoroughly before risking your capital.

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Volatility-Based Technical Analysis In addition to this user manual MetaSwing is extensively documented in the exciting new book by author Kirk Northington, Volatility-Based Technical Analysis: Strategies for Trading the Invisible. John Wiley & Sons, Publishers, copyright 2009, ISBN-10: 0470387548.

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MetaSwing - Report Download Service Included in your MetaSwing subscription is convenience of having all the MetaSwing Explorations run for you automatically. It’s especially useful to MetaStock Professional users. It reduces the need to maintain local symbol database files. As a subscriber to the MetaSwing Add-On you are eligible to receive these report results daily. Every day upon market close Northington Trading runs all of the explorations. We then sort and parse the results into a single convenient Excel file. This file is available for download at our website beginning at 6:00pm. The access password is changed daily. This service is only available for current MetaSwing subscribers. If you would like to receive a daily email link to download daily reports just send us an email requesting to be added to our distribution list. Email your request to [email protected]

mailto:[email protected]?subject=Sign%20me%20up%20for%20the%20Daily%20Report%20%20Download%20Service%20

Getting Started MetaSwing User Guide

Getting Started with MetaSwing

The MetaSwing Components MetaSwing Utilizes many indicators, which all have the “MSW” prefix. Most are used transparently by MetaSwing itself. The indicators designed for your direct use are: • MSW NB 3 Upper • MSW BB 3 Lower • MSW NB3 Upper SR Lines • MSW NB3 Lower SR Lines • MSW NB3 Upper SR Lines - Indexes • MSW NB3 Lower SR Lines - Indexes • MSW Max DLRL Delta 20 • MSW Max DSRS Delta 20 • MSW Max Divine Short • MSW Max Divine Long • MSW Trend Strength 10 • MSW Trend Strength 20 • MSW True Slope TS10 • MSW True Slope TS20 • MSW True Slope NB3U - 7 • MSW True Slope NB3L - 7 The following tools will be added to the MetaStock program as Explorations. • MSW Adeo Long • MSW Adeo Long High Slope • MSW 123 Long • MSW Exit Short • MSW Adeo Short • MSW Adeo Short Low Slope • MSW Exit Long • MSW Compression The following tools will be added to the MetaStock program as Expert Advisors. • MSW Market Index • MSW Stock • MSW Stock with CS • MSW Options • MSW FOREX The following Templates will also be added to your charts: • MSW Stock Index • MSW Stock • MSW Stock with CS • MSW Options • MSW FOREX

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Installing MetaSwing Installing MetaSwing is relatively simple. It achieves installing the following:

• MetaSwing License Manager

• MetaSwing Components

• MetaSwing.dll

Installation

Note: Be sure to close MetaStock before installation.

In the root folder of your MetaSwing CD you can find and execute:

MetaSwingSetup.exe

Doubleclick the file and it will bring up the screen below:

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As you go through the installation wizard be sure to click all of the default button choices. Installation can take from two to five minutes.

You will know that you have completed the installation when you see the screen below:

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Activating your MetaSwing License

Once the installation is done you can start MetaStock.

Upon starting MetaStock you will be greeted with this screen:

Enter your 20 digit Activation Key that you received when you ordered your MetaSwing subscription. Then click the ‘Validate’ button. Be sure to have online access at this point so that your MetaSwing License can validate itself.

Note: After your Key is successfully validated you will need to restart MetaStock.

Once MetaStock is restarted you can begin using MetaSwing.

MetaSwing uses an active license that needs to revalidate itself every 16 days. Therefore you will need a working Internet connection when revalidation is required. There is a 5 day grace period for offline use once the 16 day revalidation point is reached.

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Daily Data Updating Reuters Data is updated typically by 5:00 PM Eastern Time for US stock market data. They make every possible effort to be timely. It is best to wait until at least that time to run the Downloader utility. However there frequently seems to be some data values that are not ready at that time. These are Broad Market data values that are needed by all the indicators listed above with ‘BM’ in their names. MetaSwing uses these indicators to signal Corrections and Surges. Our experience has shown that these data values are often not ready until after 7:00 PM Eastern Time. Our recommendation is to run the Downloader at 5pm to begin your daily analysis as early as possible. Later after 7pm run it again to check for BM data. Also examine a chart after this time to check for a Correction or Surge condition that might not have shown up earlier. This could keep you from getting caught in long positions after a Correction event has occurred. The Liquidity Qualifier You should note that in the MetaSwing method trade signals (excluding FOREX and Compression), the MSW Rev custom indicator is used as a qualification criterion. It is also used as a filter in the Method Explorations. As a default the MSW Rev indicator is set to equal “1”, therefore all securities qualify. If you want to use a volume or liquidity qualifier when you view method signals on the chart, then it’s best to replace, or modify, the existing MSW Rev indicator with MS function code that stipulates your requirements. You do not need to modify different experts or indicators, because they all reference the MSW Rev function. Here is an example of code that you could reuse or modify: MSW Rev {Sets a minimum liquidity, minimum and maximum price, and a minimum volume level} ((Mov(V, 10, S)*100) * C) > 250000 AND {Min avg daily liquidity $250,000} C > 1.00 AND {Closing price above $1.00} C < 1000 AND {Closing price below $1,000.00} (Mov(V, 10, S) > 1500) {Min avg daily volume of 150,000} An easy way to perform this change is to: 1. Go to your MetaSwing CD and look in the \Resources\ folder. 2. Copy the MSW Rev.exe file to your computer’s desktop, or drive location of your choice. 3. Run this file, click OK when it asks for permission to overwrite the existing indicator. 4. If you are using the Windows Vista operating system, be sure to right click and choose to run the MSW Rev.exe file as Administrator. This will replace the protected indicator with an unprotected indicator which uses the code listed above. You can then modify it to suit your needs. When you change the MSW Rev indicator it will also affect MetaSwing explorations. They all reference the MSW Rev indicator as a qualifier.

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Opening Charts With MetaSwing

1. With the MetaStock Program open select File | Open 2. Select the Chart you would like to open and click Open to view the chart. 3. Next click the down arrow next to the Open button, and choose Open With

Template…

Choose one of the five MetaSwing templates: • MSW Stock Index • MSW Stock • MSW Stock with CS • MSW Options • MSW FOREX The MetaSwing indicators and Experts are all contained in the appropriate templates. If you want an indicator that is not already displayed in the template just access indicator QuickList and drag & drop it to an indicator pane. Note: The MSW Stock Index and MSW Stock with CS templates require local access to broad market symbol data on your hard drive. If you do not have that data then it is best to use one of the other two templates.

Indicators MetaSwing User Guide

MetaSwing Indicators While using MetaSwing for chart analysis you will primarily use its indicators and its trading signals. This section is about MetaSwing’s indicators. MetaSwing indicators are unique. They make visible that which is invisible to most other technical indicators. This is because they are volatility based. Read this section carefully. It’s important to understand the real meaning of MetaSwing’s indicators. MetaSwing’s indicators perform similarly for stock, options, and FOREX trading. Interpretations and uses included in this section apply to all in general.

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Primary MetaSwing Indicators and Components While there are many indicators that comprise MetaSwing most of them are used internally by key decision algorithms. For chart analysis you will directly be using those listed below: Component Indicator Name Component Types N Bands [upper and lower] MSW NB 3 Upper

MSW BB 3 Lower

Trading Bands

S/R Lines [1 through 8] For Stock charts. S/R Lines [1 through 8] For index charts

MSW NB3 Upper SR Lines MSW NB3 Lower SR Lines MSW NB3 Upper SR Lines - Indexes MSW NB3 Lower SR Lines - Indexes

Support / Resistance Lines

DLRL-DSRS Divine Indicators

MSW Max DLRL Delta 20 MSW Max DSRS Delta 20 MSW Max Divine Short MSW Max Divine Long

Overbought/ Oversold

MSW Trend Strength MSW Trend Strength 10 MSW Trend Strength 20

Trend Analysis

Trend Strength Slope N Band Slope

MSW True Slope TS10 MSW True Slope TS20 MSW True Slope NB3U - 7 MSW True Slope NB3L - 7

Indicator Slope Measurement

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N Bands The first and possibly the most important of the MetaSwing indicators are the N Bands. They are trading bands and as such represent price levels; thus they use the same chart scale as price. N Bands are different from Bollinger Bands, Keltner channels, or other trading bands. They are a calculation based on recent price history and the unique interaction of key volatility algorithms. At its core the N Band is a current and future measure of consolidated implied volatility. N Bands have special characteristics that you will see further in this section. The upper N Band [NBU] is colored red below, and the lower N Band [NBL] is blue. All MetaSwing indicators begin with a MSW prefix. Behavior characteristics without strong fundamental news influence:

• When price approaches the N Band it usually reverses or pauses. • Moderate immediate support is reached when price comes within one Average True

Range (ATR(40)) of the lower N Band. • Moderate immediate resistance is reached when price comes within one Average True

Range (ATR(40)) of the upper N Band. • Extreme immediate support is reached when price touches or crosses the lower N Band. • Extreme immediate resistance is reached when price touches or crosses the upper N

Band. • The above behavior characteristics are present throughout all chart periodicities. • N Band peaks and troughs form S/R lines, which are future levels of support/resistance.

N Bands are Present Support or Resistance

* ATR = Average True Range for 40 periods; ATR(40)

N Band 3 Upper

S/R 2

S/R 3

S/R 4

S/R 5

S/R 6 S/R 7

S/R 1

S/R 8 N Band 3 Lower

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As seen in the previous example N Bands are at all times Immediate Support or Resistance. MSW NB 3 Lower is support and MSW NB 3 Upper is resistance.

Price descends towards NB3L and stops at about 1 ATR above the band.

Price advances close to MSW NB 3 Upper but quickly retraces to the area 1 ATR below the band.

When price quickly advances or declines past the N Band it’s usually the result of some fundamental data or event that becomes known to the larger trading population.

In this situation price advances above upper N Band in a single day of heavy buying, and then briefly retraces. This occurrence is not uncommon when an analyst issues an upgrade to the stock.

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Example: In this daily chart of PF Chang’s China Bistro (PFCB) N Bands demonstrate how they provide immediate levels of support or resistance. Note how the angle (or slope) of the approaching N Band has much to do with the resulting price action. Reversals are more likely when the N Band is approaching at a steep angle [2]. A pause is more probable when the N Band slope is shallow [1].

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S/R Lines Another major function that N Bands perform is to define Future Support or Resistance. The reason we define the future indication as support or resistance is because these lines can function as either support or resistance at a given time depending on whether price is above or below the line. N Bands curve and flow like rivers. In so doing they create Peaks and Troughs. These peaks and troughs are very significant. Here’s how they work: All of these Support / Resistance lines are a result of

the indicators named MSW NB3U Sup/Res.

N Band 3 Upper goes up and turns down to create a peak. This defines a resistance line going forward until another peak is formed. It is shown as the dotted red line. S/R 2

S/R 3

S/R 4

S/R 1

Simultaneously a support / resistance line is formed exactly 1 ATR(40) below the peak. This also defines resistance going forward. Thus S/R 2 is one ATR less than S/R 1.

You may be wondering why each of the N Band peak and trough S/R lines has a corresponding S/R line located exactly one ATR above or below it. By establishing this zone with a one ATR area a very common trading zone is created. You will see this in action later in this manual in the section on trading the MSW 1-2-3 method. Also the upper or lower ATR line [S/R 2, 4, 5, and 7] perform support and resistance barriers as well. However lines 2, 4, 5, and 7 are generally not as dominant as lines 1, 3, 6 and 8. Actually by observing which lines are currently dominant the trader can get some insights about general trading direction.

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On N Band 3 Lower the same type of support / resistance form. The only

difference is that the Sup/Res lines that accompany the peak and trough are added to the peak and trough lines instead of being subtracted. Therefore S/R 5 is one ATR greater than S/R 6.

Peak

All of these Support / Resistance lines are all a result of the indicator titled MSW NB3L Sup/Res

S/R 7

S/R 8

S/R 5

S/R 6

Trough

Behavior characteristics without strong fundamental news influence:

• When price approaches an S/R line, without having done so recently, it usually reverses or pauses.

• Price will also experience periods of consolidation at or between S/R lines. • Areas between S/R lines frequently form trading ranges, in the short or intermediate term

timeframes. • Breakouts above S/R 4, or below S/R 5, indicate possible beginning trend formation or

continuation. • When price gaps over an S/R line it is a signal of additional price momentum in that

direction. • When an S/R line from each of two timeframes aligns closely the line becomes

significantly stronger. • When price sits at or close to an S/R line, combined with other MetaSwing signals,

specific trading methods are worth consideration. This is a result of proper cross verification.

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S/R lines serve as important levels of support and resistance, formed by the forces of recent options implied volatility levels. Example: The chart example below shows how S/R lines function as support and resistance barriers. Note the price gap across S/R 4 in November 2007. Price continued decisively in the same direction until it met resistance. Also note the trading range which resulted in March between S/R 5 and S/R 6. The other circled areas demonstrate the S/R lines functioning as basic support or resistance.

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Here’s another example. Here are two views of the same chart: Without N Bands and S/R Lines With N Bands and S/R Lines

Resistance at S/R 1 stops price from rising. This resistance was set months earlier.

Price oscillates between support and resistance at S/R 3 & 4 at left; and S/R 1 & 2 at right..

Resistance at S/R 3 stops price from rising. This resistance was set 3 weeks earlier.

Price finds support at S/R 5 and stops declining. This support was set 6 weeks earlier.

Price finds support at S/R 5 and stops declining. This support was set 7 days earlier. Additional support is added by S/R 3 from 14 weeks earlier.

S/R 2

S/R 3

S/R 4

S/R 5

S/R 6

S/R 1

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! A word about Peaks and Troughs in MetaStock! S/R Lines use the MetaStock Peak() and Trough() functions. The Peak and Trough functions are very useful. This function defines a Peak when there has been a given percentage change in the measured value from its most recent high. Likewise a Trough is not defined until there has been a given percentage change in the measured value from its most recent low. However it’s important to note that until a sufficient percentage move is made from the previous peak or trough a new one can’t be formed; i.e., made permanent. For this reason the S/R line may change for the previous few periods if a new Peak or Trough is formed. This generally occurs when price is near the N Band. This percentage change is adjustable by you. The more volatile the stock the higher the percentage should be. See the example below.

Right click on one of the Sup/Res indicators on screen. Then you can adjust the percentage change that defines when the N Band Peaks and Troughs are defined. Suggested Settings: Default 3 Market Indexes .1 NASDAQ stocks 3 NYSE stocks 2 or 3 FOREX variable Use your discretion to match the overall volatility level.

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Oversold / Overbought Indicators MetaSwing’s default oversold and overbought indicators are shown in their default configuration in the chart example below. Both indicator pairs are explained in detail in the pages that follow.

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One of MetaSwing’s big advantages is its oversold and overbought indicators. These indicators are more accurate and hearty than traditional TA indicators in part because they are trend compensated. This means that they tend to avoid the problem of remaining overbought in trend rallies and oversold in downtrends. The DLRL-DSRS indicator system consists of two indicators that operate in tandem, as a small system. MetaSwing’s primary overbought and oversold indicators are named:

• MSW Max DLRL Delta 20 [oversold] • MSW Max DSRS Delta 20 [overbought]

In the above diagram an oversold condition is measured when the DLRL indicator falls below zero. An overbought level is shown when the DSRS crosses down below zero. However just sensing an extreme condition is not really enough to interpret when a true oversold or overbought level exists. The height of the opposing indicator component is the key to determining a true extreme condition. This height is only relevant to the previous peaks of itself. By comparing the tandem component’s past energy required to lift it to its own highest levels, a true measurement of the extreme condition is made visible. In this dual role each indicator contributes to the identification of the true extreme. DLRL-DSRS Tandem behavior characteristics without strong fundamental news influence:

• Identifies a true and relative, extreme oversold/overbought price level. • As shown above and in the following example the tandem indicator height is important to

confirm a true overbought, or true oversold. • The DLRL-DSRS indicators are trend compensated to work well during trending

conditions. • The DLRL measures extreme, or ‘true’ oversold, when it is below zero and the DSRS is

at its high or higher for the previous three to six months. The respective relationship exists for overbought conditions.

• When the MetaSwing Divine oversold indicator also reads below zero the DLRL oversold reading is additionally confirmed. Often the Divine indicator will lag the DLRL by two or three periods. The respective relationship exists for overbought conditions.

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Example: In this chart there are two examples. The first is delineated by a number one on the left side of the chart, and the second shows the number two on the right side. On June 6, 2005 Cisco achieves an oversold condition with the DLRL dropping below zero; shown at the first vertical dashed line [DLRL in blue]. In the circled area below the value of the opposing DSRS indicator is shown with two horizontal lines. At that point price begins to consolidate. However the reversal does not begin until seven days later when DSRS component reaches a height that is closer to past levels [DSRS in red]. Meanwhile the DLRL remains below zero. On the right side of the chart is a second example showing a true overbought extreme. The DSRS reaches the zero line on September 6, 2005. However its teammate, the DLRL, is still at a low level of volatility compared with recent historical levels. The line showing the tandem indicator height shows that on September 9, 2005 the DLRL surpasses its own significant levels set in May and July. Bullish mathematical characteristics reached an extreme three days previously on September 6th. By September 9th it is likely that bearish math, rooted in volatility, has run its course. Consequently the short term rally runs out of steam. It is this dual form of measurement from which the DLRL/DSRS system draws it strength.

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MSW Divine Max Short [oversold indicator] And MSW Divine Max Long [overbought indicator] Another of MetaSwing’s overbought / oversold indicators are the two Divine indicators. These two are similar to the previously discussed indicators, in that they are zero based. Because they use different algorithms and data input criteria they have a unique set of strengths. They tend to be more tolerant of noise and more capable of showing relevant moves within the trend. The MSW Divine Max Short is shown in blue in the bottom pane of the chart. For comparison purposes there is a Stochastic Oscillator in the middle pane. The notated trading days show how the Divine indicators are much more reliable in times of high volatility, when ordinary indicators give whip saw readings and false signals.

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Trend Strength MetaSwing measures trend strength and weakness with these two indicators: MSW Trend Strength 10 MSW Trend Strength 20 The MetaSwing Trend Strength components’ purpose are to confirm the likelihood of a trend beginning, at trend’s existence, or when it may be coming to an end. This indicator is used as a confirming component in several trading methods; the most common of which is trend following. TTI Trend Strength is also used as an indicator pair, although the pair is not an opposing construct; it is different from the DSLRL-DSRS pair. Instead the pair is used to confirm each other. One component of the pair uses a 10 period partial look back, and the other uses a 20 period partial look back. Behavior characteristics without sudden strong fundamental news influence:

• The actual numerical value of TTI Trend Strength is unimportant. The method for interpreting it is to examine a 20 period linear regression analysis of the indicator. The positive or negative readings are derived from the positive or negative readings of the slope of the 20 period linear regression line plot.

• If both lines have positive slopes then its logic is positive for an upward trend presence. • If both lines have negative slopes then its logic is positive for a downward trend

presence. • This indicator should be used in conjunction with S/R lines for trend confirmation. • When stocks are experiencing strong trend rallies this indicator will usually warn with

negative readings just ahead of the trend’s end. Two other MetaSwing indicators help make analysis of the MSW Trend Strength indicators simple by plotting their 20 period slopes. They are the MSW True Slope TS10 and the MSW True Slope TS20.

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Example In the chart example below you can see how the MSW Trend Strength 10 and MSW Trend Strength 20 are used. The previous 20 periods are analyzed by the looking at the incline or decline of a linear regression line across that time span. If both are positive it is indicative of an uptrend. If both are negative then it points to a downtrend. There are three separate analysis points below. Milestones one and two confirm a continuing trend. The third analysis points to probable trend weakness ahead. These indicators are used as a part of a decision making framework. A faster and easier method of analyzing trend strength is to use the MSW True Slope TS10 and MSW True Slope TS20 indicators. These two indicators automatically perform the 20 period linear regression slope measurement. They are included on your charts in the MetaSwing templates; but not in the FOREX template. You can learn more about those in the next section.

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True Slope Indicators MetaSwing includes several indicators whose names begin with MSW True Slope. These indicators are present to assist the trader and the system to objectively accurately measure a rate of rise or fall. When we look at charts in most any charting software, MetaStock included, the X and Y axis is always dynamic. This can make it difficult to recognize conditions as they actually are.

Identical Charts Shown here are two chart segments of the same stock and time frame. You can notice that price range [y axis] is different. This gives the appearance of a faster rising stock price, or even higher volatility. But it’s an appearance only.

As you can see the True Slope C – Adjustable indicator is the same for ecurrently at about 32 degrees. This indicator measures the slope of the closing price. This example is using a 10 day look back period [user adjustable].

ach;

Under many circumstances a given rate of rise or decline can be important. In the case of N Bands it can indicate a rapidly closing window of time in which volatility will change.

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Example Below is another example of MSW True Slope indicators. In the bottom indicator panes you can see the MSW True Slope TS10 and MSW True Slope TS20 indicators plotted. By having the slope readings of the previous 20 periods it eliminates the need for manual analysis.

MetaSwing Methods MetaSwing User Guide

Trading with MetaSwing Methods Now it’s time to put it all together. A MetaSwing Method is a specific set of guidelines for using MetaSwing’s different components for trading. The previous sections have provided the background information needed to use MetaSwing with clarity. This section ties it all together so that you can apply MetaSwing and take some money from the markets. MetaSwing has been designed to be a logical progression to trading. It’s a logical progression meaning that we keep the horse in front of the cart. There is a structure in which any trader best uses MetaSwing, thus ensuring a dimension of discipline and optimal timing. MetaSwing Philosophy - Simple Rules to Trade By:

• Always begin your analysis efforts by examining the broad market indexes to best determine the short and intermediate term trading direction.

• Like most trading systems MetaSwing works best when you trade in the direction of the general market.

• Countertrend trades should be much shorter than those that trade in the trend’s direction. • Avoid trading against fundamental information. Actually it’s best to look for a void of

fundamental information around the security you are trading. This usually makes most forms technical analysis more reliable.

The Liquidity Qualifier You should note that in the MetaSwing method trade signals (excluding FOREX and Compression) the MSW Rev custom indicator is used as a qualification criterion. As a default the MSW Rev indicator is set to equal “1”, therefore all securities qualify. If you want to use a volume or liquidity qualifier when you view method signals on the chart, then it’s best to replace, or modify, the existing MSW Rev indicator with MS function code that stipulates your requirements. You do not need to modify different experts or indicators, because they all reference the MSW Rev function. Here is an example of code that you could reuse or modify: MSW Rev {Sets a minimum liquidity, minimum and maximum price, and a minimum volume level} ((Mov(V, 10, S)*100) * C) > 250000 AND {Min avg daily liquidity $250,000} C > 1.00 AND {Closing price above $1.00} C < 1000 AND {Closing price below $1,000.00} (Mov(V, 10, S) > 1500) {Min avg daily volume of 150,000} An easy way to perform this change is to: 1. Go to your MetaSwing CD and look in the \Resources\ folder. 2. Copy the MSW Rev.exe file to your computer’s desktop, or drive location of your choice. 3. Run this file, click OK when it asks for permission to overwrite the existing indicator. 4. If you are using the Windows Vista operating system, be sure to right click and choose to run the MSW Rev.exe file as Administrator. This will replace the protected indicator with an unprotected indicator which uses the code listed above. You can then modify it to suit your needs. When you change the MSW Rev indicator it will also affect MetaSwing explorations. They all reference the MSW Rev indicator as a qualifier.

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The Methods In this section we will show you the best way to trade these MetaSwing Methods.

• Adeo Long • Adeo Long High Slope • 123 Long • Exit Short • Adeo Short • Exit Long • Adeo Short Low Slope • Compression

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The Adeo Long There are thee primary characteristics to know about the Adeo signal:

• When used in concert with MetaSwing’s other components it provides a signal of a high probability price reversal; and thus is used as a trade/position entry point.

• Alone it can serve as a high probability exit signal for an existing position. • The Adeo will usually signal just before price will reverse, or pause for between two and

five periods. Your first step is to run the MetaStock Explorer to find potential stocks for long positions. In lieu of running the reports yourself you can sign up for the convenient Report Download Service. In this case run the MetaSwing exploration titled ‘MSW Adeo Long’. The column labeled Adeo L will find stocks that currently have an Adeo Long signal. The exploration is written so that it will identify all stocks for the most recent instance of a positive Adeo Long signal. Click the column heading to sort it. All stocks with a zero [0] value mean that the Adeo Long is being signaled for the day the report is run; assuming your data is up to date. Stocks listed with a 1 [one] mean that the Adeo Long condition most recently existed the previous day; and so on. All MetaSwing explorations are written to list candidates this way for two reasons:

1. It’s best to be able to review positive signals for the past few days to see how they are setting up.

2. Periodically studying charts in succession throughout different market conditions is the best way to learn and develop a ‘trader’s intuition’. The more past charts you study, thus viewing the potential trade’s outcome, the better you will be at trading any particular method.

On the day in question [5/17/04] there are many good potential trades to choose from. The choice of POOL is one of the best. The screen image below shows the MSW Long exploration results.

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The Adeo Long [continued] Upon careful examination of POOL we observe characteristics that make it a good candidate for an Adeo Long setup in anticipation of a bullish rally: 1. POOL has been on a strong trending rally. That’s a trend we want to trade with. 2. This stock has shown excellent strength in the past two months during a time when the

broader market was enduring a strong price decline. POOL actually reached higher lows during that period. Very impressive is the fact that on 5/10/04 POOL actually traded higher when the rest of the broader market suffered a Total Correction. This is very rare. It is a sign of strength.

3. Examining even a longer time period of this stock shows a history of respect for the S/R lines. This quality is important. Some stocks [not most] have a lot of manipulation by insiders which is driven by a whole list of possible fundamental concerns; not the least of which could be a low quantity of shares in float. These conditions cause a stock to be less affected by options trading and thus technical volatility levels.

4. Pool has recognized S/R 4 as resistance in April, and has used it as support in May. In fact on this day it trades up from an obvious intraday reversal to close within pennies of S/R 4.

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The indicator measurements for POOL are all good: • The slope of the Trend Strength indicators have both turned positive. • The Divine indicator pair are showing oversold. • The DLRL (in blue) is showing oversold because it is at zero. The DLRL (in red) has

adequate height to confirm the oversold reading. The next questions are: Where and when to enter? and What will be our sell target? An immediate entry should be acceptable. Really there are two options though. 1. Enter at S/R 4 on the next trading day. 2. Place a limit order half way between today’s low and close. This is because it’s not

uncommon to undergo another intraday test. The profit targets can be easily identified as the price levels at S/R 2 and S/R 1. A protective stop loss level should probably be just below today’s low at about 25.10. With a sell target of 28.00 then you have a fairly good risk/reward ratio.

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The Adeo Long [continued] As you can see in the following days there are multiple opportunities to enter at S/R 4. It is typical that the majority of the move comes in two days out of a six day hold period. If price had not begun to move up by day five then that is an obvious signal to exit and look for trades elsewhere. However in this case POOL goes on to remain above S/R 4 in the next few days, so a little patience can be warranted. If it had begun to break down and close below S/R 4 it would be best to exit quickly. The next level of support is a long way down. Exiting can be optimized by using:

• The Exit Long signal; which is the small blue exit sign • Waiting until just after the DLRL crosses above the DSRS • Waiting until price rises to a key resistance level such as an N Band or S/R line.

This trade turns out quite well with an 8% profit realized.

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Adeo Long HS Adeo Long HS is the same as the Adeo Long with the exception that HS stands for High Slope. This occurs when the NB3 Lower is rising towards price at a fast rate. The true slope in degrees is measured by MSW True Slope NB3L – 7. If the slope is higher than 45 degrees and an Adeo Long exists then presto you have an Adeo Long HS. Remember: the lower N Band is very strong immediate support, and the upper N Band is very strong immediate resistance. This combination is significant because of the very strong support that the lower N Band gives to a falling price. With the lower band approaching rapidly, velocity does its work. An even stronger condition exists when there is a Volatility Shift (VS) notation beneath the Adeo signal. This means that the upper N Band is descending at only half the rate at which the lower N Band is rising. Put another way, support is rising twice as fast as resistance is falling. This condition points towards a higher trading range in the short term

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Adeo Long HS [continued] After examining the market index conditions and determining that they are short term bullish, we run the MSW Long exploration. In the column labeled Adeo LHS [Adeo Long High Slope], there are a good many stocks to choose from. One of the best is DYN. 1. DYN exhibits a strong bullish trend 2. A lower N Band peak seems to be forming because the lower band is rising fast 3. As a bonus S/R 3 & 4 seem to be lining up to give double support for what is likely to be the

new levels for S/R 5 & 6 4. The MSW Divine Max Short and the DLRL indicators are each below zero. This means that

this stock is quite oversold, considering its current trend. 5. Be sure to check for earnings and news reports. Also DYN is a utility stock. Check to make

sure that the commodity influences of oil and natural gas aren’t particularly abnormal at this time.

6. DYN has a current ATR of .17. The lower N Band is at 6.34. Placing a limit order at 1 ATR above it would be at 6.51. It can be adjusted upward for consistency the next day, or left as is to be conservative. The stock’s current ATR value is listed in the Expert Commentary.


Adeo Long HS [continued] Looking at how the trade turned out below, you can see that the limit order would have picked up at 6.51 or 6.53. Using multiple of two ATR values would target a .34 per share profit. This would be about 5% for a four day trade. While there is no absolute method, a good rule to follow with MetaSwing is to exit a short term trade when the daily DLRL crosses above the DSRS. In this case there are three factors that reduce risk: 1. You are trading with the general market direction. 2. DYN is on a healthy up trend without any visible signs of topping. 3. Support and resistance is being provided by S/R 4&5 and NBL3 which is on a collision course

with price. Note: On the chart you see below there are double/corresponding lines of S/R present. [S/R 3 on S/R5, and S/R 4 on S/R 6]. In reality the S/R 5&6 lines will not be at their current values until two days into the trade. The NB3L must move lower by 2% [in this case] in order for this Peak to form. Once that occurs the lines for the previous two days will reform at the new level. This is how peaks and troughs work. This process is discussed in detail on page 5 of the Indicators section.

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The 1-2-3 Long The 123 Long is quick, simple ‘hit and run’ kind of trade. It is most useful during times of obvious low volatility bull rallies, when price does not dip enough to present a trend entry. It’s really a very simple setup and execution. Price rises through a resistance line, created by a peak or a trough of the upper N Band, S/R 1 or 3, and closes above it. Then it retraces back a bit down through the same line but is still above the one ATR support line below; S/R 2 or 4. The strategy is that the stock’s price has a high probability of finding support at S/R 2 or 4. Then in the next few days the price will either trade sideways, or continue to trend upwards. This leaves a high probability trading range between the two lines. In order to ensure that the stock is on a strong upward trend the condition will not signal if price has closed above the respective support line for some time; S/R 2 or 4.

The 123 Sequence

Once the trade has setup and signaled, enter a limit order at the lower S/R line. Only leave the limit order open for a maximum of 5 periods from the original 123 signal day. If the order is in force for any longer then the trade probability decreases below an acceptable level. Also if the price rises up to close above the upper S/R line then the trade setup is over. Cancel the order. In step two the limit order to enter the position on the long side is filled. Immediately place a sell limit order at the upper S/R line. This is extremely important to do this right away. Many 123 trades pick up and sell all in one trading day. You now have five periods from the time of entry to complete the trade. Be sure to exit by the end of the fifth day. In the final step the sell limit order closes the position and takes the profits off the table. Placing a trailing stop at just below the S/R line is sometimes an option if you have significant reason to believe the price will continue to rise. However it’s usually best to trade it with just the one ATR profit target in mind.

S/R 3

S/R 4

S/R 3

S/R 4

Day 1 - 2 – 3 – 4 - 5

S/R 3

S/R 4

1

2

3

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The 1-2-3 Long [continued] After running the MSW 1-2-3 Long exploration ARNA seems to be an excellent choice. The characteristics that make ARNA good are: 1. In December it takes significant price jump as evidenced by the large upside gap. This gap is

never tested or closed. Its price starts trading up and does not look back. 2. The stock goes on to test and rise through the 18.00 price range with a solid resolve;

meaning that it exhibits small gaps across the S/R lines. Gapping across S/R lines is always a healthy sign. Also multiple testing of a resistance level serves to deplete the supply of sellers.

3. Actually this stock has been on a steady rally for many months. 4. It’s important to note that the oversold/overbought indicators are not usually going to support

a long trade in a 123 setup. In the 123 method it’s okay to ignore them. e in a 123 setup. In the 123 method it’s okay to ignore them.

2

4

1

S/R 2 S/R 3 S/R 4

S/R 5 S/R 6

S/R 7 S/R 8

S/R 1

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The 123 Long [continued] By placing the order on the evening of 3/7/06, or the next morning on 3/8/06 before the market opens, you are ready for entry into this trade. The order picks up during the trading day of 3/8/06. If the trader is timely and enters the limit order to sell, then the order opens and closes for a profit of 3% all in one day. 123 Long trades are not designed to capture huge swings. They are just as profitable in their own way because they’re low risk, with a high probability of reaching their target price. Just be sure to pay strict attention to the time frame rules laid out on the previous pages.

S/R 2 S/R 3

S/R 4

S/R 5

S/R 6

S/R 7

S/R 1

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MetaSwing Exit Signals There are two things to know about the MetaSwing Exit signal:

• Alone it can serve as a high probability exit signal for an existing position. • When used in concert with MetaSwing’s other components it provides a signal of a high

probability price reversal; and thus is used as a trade/position entry point. Exit Long Exit Short

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The Exit Short The Exit Short method can be a powerful swing signal. In the Indicators section of this manual this signal is explained as a condition which prompts you to close out a short position. Because this indicator is not based on overbought/overbought conditions it can also be a great signal that price is going to reverse course; especially when the broad market will likely be trading in a reverse direction as well. 1. On 6/27/07 both Trend Strength slopes are positive. 2. OXY is on a great rally. In the past few months it has consistently risen through S/R levels

with no failures. 3. On 6/27/07 it opens at S/R 1 and closes higher, while signaling an Exit Short. Once again

major support has held just as in the past months. 4. A look at the oversold indicators both confirm with readings below zero. The DSRS has good

height to confirm the oversold condition. 5. Note the fast rise of lower N Band. In two or three days it will be within 1 ATR of the current

low. That means that additional support is rising toward where price could be if it turns down. 6. While some of the buying momentum is likely used up in its 3% rise from the open, there is

still a probable profit target up to its recent highs at about 60. That’s another potential 6%. 7. This warrants an entry into a long position at market open the next day, at or near the present

day’s close. A stop level just below S/R 2 is probably best.

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The Exit Short [continued] As you can see below trading with the trend has its benefits. OXY continues on a solid rally past its previous highs. If managed well this trade should yield about 7.5% profit. As the trade progresses it becomes obvious that price is on a collision course with the upper N Band. When it approaches 1 Average True Range (ATR) of this band, resistance will get much more significant. As you can see price consolidates for two days before continuing on to exhaust itself. An exit within the one ATR zone of the upper band is generally a good strategy because it puts the statistical odds in your favor of keeping profits, instead of giving them back. Another important indicator level is the DLRL and DSRS. The DLRL crosses above the DSRS while price is rising to an approaching upper N Band. In cases such as this you may not want to when the cross occurs. It’s often best to wait until N Band resistance is reached. On 7/9/07 price reaches close to the N Band; see the vertical dashed line. This is a natural short term exit that puts probabilities in your favor. Also note that the N Band percentage thresholds have been adjusted to 2% for this chart.

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Adeo Short Adeo Shorts are very much the same as Adeo Longs. It’s important to note that stocks don’t usually go down in price for the same reasons that they rise in price. However it’s best to look for much of the same characteristics for good trade candidates. Run the MSW Adeo Short exploration for this method. On 9/13/06 OSTK is in an Adeo Short condition. Here’s what makes OSTK a good short trade: 1. OSTK has been on a steady bearish trend for many months. 2. During that time whenever Adeo Shorts and Exit Longs have signaled the stock sold off. 3. In recent weeks OSTK tried to rise in price but was slowed by resistance lines at S/R 5 and 4. 4. In July there were surge events and yet the price continued to drop and show weakness. 5. Currently price is stopped below resistance at S/R 3. 6. The overbought indicators are all signaling at or beneath zero. This all adds up to a very good setup for a short entry. Since the price has already tested the S/R 3 line, a short entry near the current close is warranted. However it would not be wise to enter beneath S/R 4 in this case.

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Adeo Short [continued] As this trade progresses it is important to think about a stop loss price and a target profit price. The only logical stop loss price would be a close above the previous day’s high at 21.00. With a short it’s best to look for immediate declines in price. In this case if the price were to close above S/R 3 for two consecutive days then it would be a sure sign to exit the trade. There are two good visible profit targets. The first is potential support at S/R 4. The second profit target is support at S/R 5, which is also near the lows set two weeks prior. If you were to exit at S/R 5 [17.90] it would yield a profit of 13%. An exit at S/R 4 would be only 5%. Another way to manage profit taking is to use the indicator crossings as a signal. The DSRS crosses above the DLRL quickly; just as price comes to rest on the S/R 4 line. However since the overbought Divine indicator is still at zero, it would likely be suitable to wait and see what happens. If you wish to be very risk averse perhaps taking in half the position is a good choice.

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Exit Long The Exit Long method is the same as the Exit Short only reversed. PSA signaled an Exit Long condition on 7/5/07. Here’s what we like about this short trade setup: 1. PSA is on a very strong downtrend for six months. 2. Virtually all shorting signals have worked well in the past six months. This means that there

are no recent signs that the trend may be getting prepared for a reversal. 3. PSA is sitting almost right at resistance at S/R 5. The current day’s intraday activity indicates

a reversal, just like the previous two reversals on 5/31/07 and 4/25/07. 4. Support at S/R 6 was broken when price closed beneath it three days previously. 5. The overbought indicators at the bottom of the chart are showing readings of almost below

zero. The recent Trend Strength slopes have been negative and are now mixed. 6. Recent correction signals caused the stock to sell off significantly; no strength there. 7. Because the overbought indicators are not yet fully beneath zero it’s best to enter a limit

order anticipating that price could rise a bit higher the next day. Therefore at this point it would be best to set the limit order at 81.90. Just slightly below today’s high.


Exit Long [continued] PSA continues on its down trend but shapes up to be a very interesting trade management scenario. After placing entry limit order at 81.90 it does not pick upon 7/6/07. Additionally PSA then signals an Adeo Short. This means that it’s time to enter at the open on the next market day, which turns out to be 80.65. In managing this trade and finding exit points, there are several scenarios. Each would have been considered successful. 1. Exiting near recent lows at the previous S/R 7 line is a natural target. 2. If you thought that a further price decline would happen, then using S/R 6 as a stop limit level

would have exited you there. 3. However if you did not use an actual stop limit order as a protective stop, then you would

have seen that when price closed above S/R 6 on 7/13/07 it also signaled another Exit Long. This could be a good sign to stay in the trade a little further.

ove S/R 6 on 7/13/07 it also signaled another Exit Long. This could be a good sign to stay in the trade a little further.

4. Price then continues to trend downward until the indicator cross day on 7/24/07. 4. Price then continues to trend downward until the indicator cross day on 7/24/07. 5. Even though you are currently in this trade for eleven days at this point, you are in luck! A

Total Correction occurs on day eleven. That’s a signal to stay short and make even more money.

5. Even though you are currently in this trade for eleven days at this point, you are in luck! A Total Correction occurs on day eleven. That’s a signal to stay short and make even more money.

Initial entry point

Revised entry point S/R 5

S/R 6

S/R 7

S/R 8 Possible exit points

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The Adeo Short LS The Adeo Short with Low Slope is the same as the Adeo Long HS, except it is a method for shorting. Therefore similar rules apply. It’s called a low slope because the upper N Band must have a slope measurement of -45 or less. If that criterion is met, then a Volatility Shift (VS) condition exists when the lower N Band is rising at less than half that rate. In other word the lower N Band would need to have a 22.5 degree slope or less. In the example below the correct technical measurements for a short trade are present at the candle delineated by the vertically dashed line because:

• The Divine and the DSRS show overbought readings. Additionally the high DLRL reading confirms them as an extreme overbought.

• The slope measurements of both Trend Strength indicators are negative. • An Adeo VS and LS signal at the upper N Band. • OMTR has been on an obvious downtrend for months.

The short works out well. You could choose to cover at the Exit Short signal or hold on for the DSRS to cross above the DLRL. Another possibility is to stay in the trend with a trailing stop.

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The Compression The Compression method is for finding trade setups for Condor and Butterfly option spreads. This is very different from the other MetaSwing methods that seek to predict directional price movement. The goal of the Compression method is to predict a period of 3 to 4 weeks of low price volatility. These specific option spreads make money when price does not move. The Compression method is produced using a Weekly chart periodicity. Here’s what the Compression signal looks like: Upper Lower The weekly chart of TNB below depicts absence of well defined trading ranges. To enter at any give spot would be a crap shoot, for the purpose of banking on 4 weeks of low price volatility.

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The Compression [continued] Below is the same chart of TNB; except that we have zoomed in on it a bit. The weekly candle with the upper Compression signal above it is denoted with a vertically dashed line. The Compression is designed to predict a 3.5 week period where price remains between S/R 1 and S/R 4. Typically the area of S/R 1 to S/R 4 will be contained within the upper and lower strike levels of the option spread. A detailed statistical study is presented in Volatility-Based Technical Analysis: Strategies for Trading the Invisible, John Wiley & Sons, Publishers. In the example below the weeks following the Compression signal are notated above the S/R 1 line. Price moves some, but in general it pauses from its six month rally long enough to produce a successful Condor or Butterfly trade. The criteria that define a Compression setup are listed below.

• The Compression setup is found on a weekly chart. • Price rises up through the S/R 4 line and closes above the S/R 3 line. • Price has not closed above the S/R 3 line in the past three weeks. • The price high has not crossed above the S/R 1 line in the past three weeks. • The distance between S/R 2 and S/R 3 is less than one unit of ATR(40). • This means that the distance between S/R 1 and S/R 4 is less than three units of

ATR(40).

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MetaSwing System Tests The following system tests are provided with MetaSwing: • MSW Adeo Long • MSW Adeo Short • MSW Exit Short • MSW Exit Long

Refer to your MetaStock User Manual for the steps required to use the Enhanced System Tester. Important Notes about MetaSwing Tests MetaSwing is a discretionary trading system. The system tests included do not include the majority of the best practices for trading the MetaSwing methods. These tests have only very basic entry and exit rules. It is beyond the capabilities of the system tester to fully quantify and code MetaSwing discretionary methods. Therefore the tests included herein are recommended for establishing a baseline of measurement against specific securities. By using the rules and best practices listed in the MetaSwing User Guide you should be able to achieve a better level of results than produced by these tests. Trading performance is always a byproduct of the system traded and the skill of the trader.

MetaSwing Explorations MetaSwing User Guide

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MetaSwing Explorations Below are the MetaSwing Explorations:

• MSW Adeo Long • MSW Adeo Long High Slope • MSW 123 Long • MSW Exit Short • MSW Adeo Short • MSW Adeo Short Low Slope • MSW Exit Long • MSW Compression

Each of these explorations are written to provide you with a trade signal’s status for the past five days. The value returned in the report column will be a 0, 1, 2, 3, or 4. A zero indicates that the signal in question is present for the most recent price bar in the data. A 1 means that it is not present currently, but was present one bar ago. A 2 means the most recent occurrence of the signal was two bars ago, etc. MetaSwing - Report Download Service Included in your MetaSwing subscription is convenience of having all the MetaSwing Explorations run for you automatically. It’s especially useful to MetaStock Professional users. It reduces the need to maintain local symbol database files. As a subscriber to the MetaSwing Add-On you are eligible to receive these report results daily. Every day upon market close Northington Trading runs all of the explorations. We then sort and parse the results into a single convenient Excel file. This file is available for download at our website beginning at 6:00pm. The access password is changed daily. This service is only available for current MetaSwing subscribers. If you would like to receive a daily email link to download daily reports just send us an email requesting to be added to our distribution list. Email your request to [email protected]


MetaSwing Explorations MetaSwing User Guide

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The MetaSwing Exploration code If you would like to see the MS code that comprises these explorations we will gladly send it to you. We always encourage any MetaSwing user who wants to create his/her own custom explorations to search for potential trade setups using the MetaSwing components. To request it just send an email to [email protected] The Liquidity Qualifier You should note that in the MetaSwing explorations (excluding FOREX and Compression) the MSW Rev custom indicator is used as a filter. As a default the MSW Rev indicator is set to equal “1”. If you want to use a volume or liquidity qualifier when you search for opportunities, then it’s best to replace, or modify, the existing MSW Rev indicator with MS function code that stipulates your requirements. Here is an example of code that you could reuse or modify: MSW Rev {Sets a minimum liquidity, minimum and maximum price, and a minimum volume level} ((Mov(V, 10, S)*100) * C) > 250000 AND {Min avg daily liquidity $250,000} C > 1.00 AND {Closing price above $1.00} C < 1000 AND {Closing price below $1,000.00} (Mov(V, 10, S) > 1500) {Min avg daily volume of 150,000} An easy way to perform this change is to: 1. Go to your MetaSwing CD and look in the \Resources\ folder. 2. Copy the MSW Rev.exe file to your computer’s desktop, or drive location of your choice. 3. Run this file, click OK when it asks for permission to overwrite the existing indicator. 4. If you are using the Windows Vista operating system, be sure to right click and choose to run the MSW Rev.exe file as Administrator. This will replace the protected indicator with an unprotected indicator which uses the code listed above. You can then modify it to suit your needs. When you change the MSW Rev indicator it will also affect MetaSwing chart based trading signals. They all reference the MSW Rev indicator as a qualifier.

Correction and Surge MetaSwing User Guide

The Correction Surge System The Correction Surge (CS) system is a collection of market breadth signals. They are independently calculated for the NYSE and the NASDAQ. They are very strong signals that provide a high degree of broad market directional intelligence. If you pay close attention to them you will more often be trading on the ‘right’ side of the market. The Correction signals warn of prices trading lower in the short and intermediate term. The Surge signals predict higher trading in the intermediate term. Correctly forecasting the short and intermediate term market swing is the most important form of analysis an active trader can perform. The CS system will help greatly. The CS system is in these two chart experts: MSW Market Index MSW Stock with CS These chart experts are used as a default in these two templates: MSW Stock Index MSW Stock with CS To use the CS system, load a chart using one of the two templates above. To avoid using the CS system, then load the chart with one of the other three available templates.

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CS System Data Requirements This system uses the following six data values: Advancing Issues NYSE Declining Issues NYSE Unchanged Issues NYSE Advancing Issues NASDAQ Declining Issues NASDAQ Unchanged Issues NASDAQ These symbols must reside locally on your computer’s C: drive. The CS system does not work with real-time data, because the six values above will update too slowly; your chart screen will virtually freeze waiting on data updating. MetaSwing is designed to work with the following three data vendors: Reuters DataLink, Reuters QuoteCenter, and eSignal. The corresponding symbol names for these data values with vary based on your data vendor. During the installation process MetaSwing created two new security data folders, and populated them with the security files needed: C:\MetaStock Data\BM Data 1\ C:\MetaStock Data\BM Data 2\ Using the downloader, it is necessary to update the symbols in BM Data1 if you use DataLink or QuoteCenter every day. If you use eSignal then be sure to update BM Data 2 every day. Daily Broad Market Data Updating Reuters Data is usually updated by 5:00 PM Eastern Time for US stock market data. They make every possible effort to be timely. It is best to wait until at least that time to run the Downloader utility. However the six broad market data values above are frequently not ready at that time. That data is reported by the exchanges and Reuters has no control over their timeliness. MetaSwing uses these indicators to signal Corrections and Surges. Note that if these data values are not yet updated they will have the previous day’s value, which can be a bit confusing or misleading. Our experience has shown that these data values are often not ready until after 7:00 PM Eastern (US) Time. Our recommendation is to run the Downloader at 5pm to begin your daily analysis as early as possible. Later after 7pm run it again to check for BM data. Also examine a chart after this time to check for a Correction or Surge condition that might not have shown up earlier. This could keep you from getting caught in long positions after a Correction event has occurred.

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The Correction Signal Correction and Surge symbols are the most powerful and significant signals in MetaSwing. When a new Correction symbol occurs the majority of stocks will be sold in following three to ten days. In a Correction event sellers out number buyers so dramatically that volatility increases across the entire stock market.

Correction NASDAQ NASDQ wide breadth sell-off event Correction NYSE NYSE wide breadth sell-off event Total Market Correction Simultaneous NASDAQ and NYSE wide breadth sell-off event

Key Rules:

The most significant Correction event is when it’s the first that occurs in more than three weeks. The Total Correction is the most meaningful signal.

The most logical move the trader can make when this happens is to exit all long positions and go short. There’s no magic analysis to it; just go short. The odds favor taking short positions only for a few periods. Examine MetaSwing charts of the indexes and I’m sure you will come to the same conclusion. Actually if you were in any long positions on the day when the first Correction event happens then you have likely lost money. By exiting long positions upon market opening the next day and shorting stocks or index funds you will likely recoup most or all of your losses over the next few days.

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The Correction symbol, shown here as the dreaded skull and crossbones, is triggered by a market day where stocks advancing in price far exceed the number of stocks declining in price all on the same exchange. This comparison of ‘advancers’ versus ‘decliners’ is commonly termed market breadth. The red Correction signals the event happened at the NASDAQ exchange, whereas the blue Correction shows that the sell-off event happened at the NYSE. The larger black symbol represents a Total Correction; indicating a sell-off event occurring on both the NASDAQ and the NYSE. It’s also important to note that in a bear market trend or short term market correction, until Surge symbols begin to appear, Correction symbols serve as continuation signals. Surge signals will tell you when the bottom is forming.

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The example below occurred during the bear market of 2008. This chart uses the Stock Index template. Take note of the three circled Correction signals. Each was the first Correction signal to occur in roughly three weeks or more. This characteristic makes them highly significant. The Correction signals, in concert with the BBPP trend ribbon at the charts bottom, gives adequate directional intelligence to keep you on the right side of the market during this highly volatile time.

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The Surge Signal Correction and Surge symbols are the most powerful and significant signals in MetaSwing. When a Surge symbol occurs the majority of stocks will be being accumulated in following three to five days.

Surge NASDAQ NASDQ wide breadth accumulation event Surge NYSE NYSE wide breadth accumulation event Total Market Surge Simultaneous NASDAQ and NYSE wide breadth accumulation event

Key Rules:

The main strength of Surge signals is to identify the formation of an intermediate term bottom. When two successive surge signals occur within two weeks of each other, without a correction event between them, there is a probable intermediate term bottom forming. A surge signal in a bull rally, not preceded by a correction signal serves as a continuation signal.

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In a Surge event, buyers so greatly out number sellers that the vast majority of market participants won’t be doing much selling in the next few days. Just as with a Correction event the Surge event is a market breadth indication. Both events indicate heavy one sided activity by the largest market institutions; the smart money. Surge events happen within two different scenarios. The more significant of the two scenarios is in the forming of an intermediate market bottom in a longer term bull market. This always follows a general market correction. Metaswing will signal a series of Correction events all which accompany a sharp short term downward trend. A market bottom successfully forms when a series of Surge events print along a horizontal or rising price level. Also important to note is that when recent Surge events are more numerous than Correction events, it is an indication that the immediate and future short term trend is resuming with an upward bias. Another significant characteristic of a Surge signal is that it serves as a continuation signal in a rising bull trend. This is apparent when a Surge symbol is printed on the chart without being preceded by a Correction Symbol.

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NOTE Correction symbols and Surge symbols are related only to the overall market activity. Activity within a specific stock is not a part of this symbol or the logic behind the symbol. As a function of the MetaSwing Stock with CS expert these Correction and Surge symbols appear on the chart. We have designed MetaSwing this way because we strongly believe that even when looking at a chart of a specific stock it’s vital to weigh the phase of the general market against any trading decisions. Therefore if the symbol is on the chart it won’t be ‘out-of-sight/out-of-mind’. In the chart of ESRX to the right, this strong medical sector stock does not seem phased by the nasty corrections that hit the markets in late 2007. It seemed to weather the stormy overall market conditions quite well; certainly better than the indexes did. However when you look closely at the trading direction immediately following the Correction symbols it’s obvious that even stocks with high demand suffer to some degree when there is extreme fear running through the market. Therefore it’s always best to err on the safe side. Even if you have reason to be extremely confident in your stock selection the odds favor going to cash and looking for some pull back before reentering a long position. Remember swing trading is not investing.

Market Cycle Identification and Anticipation MetaSwing User Guide

Market Cycle Identification and Anticipation As a swing trader you are a cherry picker. Low hanging fruit are what you focus on. Finding that which is hanging low enough is important, but not all that’s needed. There is another dimension to it. It’s as though you don’t actually get to touch the fruit, and you will depend on it falling to where you are standing. If that’s the case then it’s critical to know which way the wind is blowing. In the markets the wind is always blowing. But is it more important to know which way it’s blowing or which way it’s about to blow? Relating this metaphor to the subject at hand, swing traders need to accurately predict what the market is about to do. You can look at a current chart and know exactly what it’s doing. That’s not the challenge, and it is of only so much value. Predicting what’s about to happen is the most valuable capability. All of this applies just as heavily to the position trader that wants to enter a trend at the best possible time. This is where the MSW Market Index expert comes into play; it is applied automatically by the MSW Stock Index template. This expert includes a Bull / Bear Phase Predictor (BBPP) ribbon at the bottom of the screen. This phase predictor is there to give you advance alert that the broader market is beginning to set up for a short term bullish up-swing, or a short term bearish down-swing. The purpose of the BBPP is to identify stock trades in advance; not to trade the indexes. Note: To use the BBPP you must have the Correction Surge signals working correctly. Consult the Correction Surge section of this user guide for those data requirements. The purpose of the Bull / Bear Phase Predictor is to:

• Notify the trader ahead of time that the broader market is likely to be setting up for a short term swing move in a particular direction.

• Give the trader time in advance to begin looking for potential stock trades in the direction

of the predictor.

• Allow the trader to run MetaSwing explorations to identify entry points for stock trades in the direction that is being predicted by placing limit orders at appropriate prices.

• Enable the trader to tighten stops, reexamine exit targets, and other analysis for currently

open positions, which is important in protecting profits.

• Alert the trader to carefully examine the current state and behavior of the other indicators that indicate overbought/oversold conditions, trend changes, as well as the current location of important support/resistance levels.

The Bull / Bear Phase Predictor does NOT:

• Mean that the trader should immediately exit a long position if the predictor turns to a Bear indication; or vice versa.

• Indicate that the predicted phase exists on the day that the predictor first indicates a

change of state. It’s a future predictor.

• Work with 100% accuracy. Nothing does. However if the trader can improve entry/exit points, use tighter stops, and thus achieve higher percentage profits.

• Give adequate signals alone to trade market index ETF’s.

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It is recommended to use the Bull / Bear phase predictor on the daily chart of the S&P 500 [.SPX] as a standard reference (Reuters DataLink symbols or equivalent). It is also important to consider the predictor on the daily charts of the DJ 30 [.DJI], the NASDAQ Composite Index [.IXIC], the Russell 2000 Index [.RUX] and the NASDAQ 100 Index [.NDX]. These others are essential for confirmation purposes. Each however have a more weighted representation of different portions of the market, and can help further by representing more closely specific sectors that you trade. However the S&P 500 is the best general representation of the US based large cap stock market. Now let’s examine an actual case. Below is the daily chart of the S&P 500 [11/2005 thru 1/2006]. Notice that on 11/22/05 the phase indicator changes from neutral to bearish. In the preceding weeks the markets emerged from a well defined down trend lasting months. It then broke that trend and reversed upward for a month leading up to this signal. There is more about dealing with this type of larger trend break later in this section. Upon seeing this phase change to bearish, the next step is to run an exploration that searches for short trade candidates. Remember the trade foundations in the previous section; trade with the trend. [this example continued on the next page]

S/R 1

S/R 6 S/R 5

S/R 4

S/R 3

S/R 2

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Upon running an exploration on 11/21/05 we don’t find very many short candidates. Most stocks at this time are on strong intermediate trends. However there are a few stocks that look quite weak and have been on well defined down trends. One such stock was IMH. See the chart below On 11/21/05 IMH signals an Adeo Short condition. It’s also hitting significant resistance at S/R 3 and has closed within one ATR of NB3 Upper. A glance back at the S&P 500 chart shows that it is currently rising toward resistance at S/R 2; suggesting a little more market rise prior to a bearish swing. Therefore a limit order to short IMH slightly above its current close, maybe at the NB3 Upper value, should be a good entry point. Doing so produces an entry point on 11/22/05 at 11.62. Stubbornly IMH resists turning down immediately but does obey the general market direction six days after entry. While this trade takes a little longer than one would like, reasonable stop management of one ATR value provides adequate protection. Indeed on day 7 there is an 8% to 10% profit reached at the Exit Long signal. This is a real world example with some of the usual imperfections.

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S/R 8

S/R 7

S/R 6

S/R 5

S/R 4

S/R 3

S/R 2 S/R 1


Caution: Intermediate Trend Direction Changes Trading systems and indicators are always troubled by a sudden break in a strong trend. It throws indicators into extreme readings and causes false signals. Volatility based technical indicators cope with these difficult times better than any other technical analysis algorithms, but still there are difficult times that require user intervention and exception based interpretation. When a broad market index such as the S&P 500 Index exhibits this behavior your understanding of the situation is required. Below is an example. Once the trend is solidly broken on the week beginning 8/23/04 the bear phase prediction does not materialize. Here’s how to deal with this situation. In the situation below only trust the bear phase prediction once prices have risen above the S/R 3 level. This gives the system time to adjust to the trend change. The same rule works in an inverse situation where prices fall through a supporting trend line. Then you should only trust a bull phase prediction once price reaches S/R 6.

S/R 2

S/R 3

S/R 4

S/R 5

S/R 6

S/R 7

S/R 8

S/R 1

S/R 3

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If you are interested in a more advanced study on predicting the short and intermediate broad market trading direction then we recommend reading: Chapter 8: Bull Bear Phase Prediction - The Intermediate and Short Term Market Swing, Volatility-Based Technical Analysis: Strategies for Trading the Invisible. John Wiley & Sons, Publishers, copyright 2009, ISBN-10: 0470387548.

MetaSwing FOREX MetaSwing User Guide

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MetaSwing FOREX MetaSwing’s volatility based indicators and algorithms are well suited to currency technical analysis and trading. In this section we will show pertinent graphic examples of MetaSwing’s indicators and FOREX expert. This should help to confirm how the best practices and interpretations shown in previous sections apply to FOREX trading.


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Indicators and Support Here is an example of the British Pound on a 2 Day periodicity chart:

1. It encounters support at S/R 5 which begins at 1 ATR above the Lower N Band. 2. An Adeo Long condition is signaling just as it is also doing on the daily chart. 3. Simultaneously the Oversold indicators signal extreme lows below or at zero. 4. In this case the use of multiple time frame analysis is very helpful to confirm the daily

chart. 5. The ensuing Exit Long signal is successful at providing a sell action. Exit Long and Exit

Short signals are very accurate in MetaSwing.


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Indicators and Trade Signals Here is an example of the Euro on a Daily periodicity chart:

1. Below are three individual swings showing reversal points. None of them are ideal setups.

2. Each of them have two things in common: • An extreme reading below zero of a Divine indicator. • A preliminary signal of an Exit or an Adeo in the recent preceding candles

3. This is a repeating trade setup in FOREX. A signal such as you see below occurs. Then a few periods later when the Divine indicator slides below zero a change in trading direction becomes much more likely.


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Support and Resistance In the example below of the Japanese Yen you can see four examples of N Band Peak / Trough Support and Resistance. In FOREX trading the N Band Support and Resistance lines are high probability reversal points. The set up occurs on the daily chart, and is then well executed on an intraday basis. The examples below occur independent of indicator extreme readings.

• Circle 1 – An important macroeconomic event pushes the Yen to volatility extremes. It’s no coincidence that the advance was contained at the N Band.

• Circle 2 – Two weeks later S/R 4 provides resistance and causes a four day reversal. • Circle 3 – The Yen advances on up to S/R 3 but is turned down yet again. • Circle 4 – The Yen then trades downward to find support and a reversal point at S/R 5

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