What is the Accumulative Swing Index (ASI)?
The Swing Index (SI) is a popular technical indicator designed to predict movements in securities prices, mainly to inform futures trading. In the meantime, the Accumulative Swing Index (ASI) shows the cumulative value of the swing index over a certain period of time.
The SI incorporates the differences between opening and closing prices on consecutive days. The ASI analyses a security’s opening price, high price, low price and closing price for the current and previous trading sections.
The prices are compared in the following ways:
previous closing price with previous opening price;
current closing price with previous closing price;
current closing price with opening price;
highest intraday price with previous closing price;
lowest intraday price with previous closing price.
Who invented the Accumulative Swing Index?
The ASI was developed by J. Welles Wilder Jr., an American mechanical engineer who became a real estate developer and then a full-time market trader and researcher. He once said: “Somewhere amidst the maze of Open, High, Low and Close prices is a phantom line that is the real market.” The ASI attempts to show this “real market”.
Wilder developed several important technical indicators that are now considered the basis of a robust technical analysis strategy, and they are at the core of modern technical analysis software. He developed the commonly-used Relative Strength Index (RSI), as well as the average directional index, the Parabolic Stop and Reverse (SAR) and the Average True Range (ATR). He also calculated an exponential weighted moving average, which is known as Wilder's Moving Average.
Wilder’s work on technical analysis was detailed in his book, New Concepts in Technical Trading Systems, published in 1978. He went on to publish three other books: The Adam Theory of Markets or What Matters Is Profit (1987), The Wisdom of the Ages in Acquiring Wealth (1989) and The Delta Phenomenon: or, The Hidden Order in All Markets (1991).
Why is the Accumulative Swing Index useful for traders?
An Accumulative Swing Index strategy is particularly useful for swing trading, as it confirms changes in price direction.
Swing traders focus on small price changes into either direction, on the basis that prices constantly shift up and down. They open long or short positions that they hold only for short time periods before taking profits. In that way, traders can make profits from intraday gains even if a security price is below the previous close, and profit from prices that fall intraday despite trading above the previous close.
Traders use ASI as a tool to identify breakouts from trends and confirm price divergence, helping them to make decisions on when to open and close trades.
Although the indicator was created for futures prices, traders can also use it to analyse long-term stock and currency price moves.
How to interpret the Accumulative Swing Index
As the Accumulative Swing Index indicator is based on the price of a security, it typically follows the candlestick pattern on a price chart. It plots a cumulative total for the Swing Index value of each candle.
The ASI shows technical support and resistance levels and provides confirmation of trends once the price breaks through either one of those levels. As an index, the trendline usually works in a range between 100 and -100.
It is typically charted as a standalone trendline, similar to volume bar charts.
When prices swing higher, the ASI value moves above zero and increases along the scale towards 100. Conversely, when prices swing lower into a downtrend, the value turns negative and moves down towards -100.
A swing signal is defined as when the price of the security breaches the previous high or low swing. When the ASI number is positive, it indicates the price will trend higher over the long term, and when it is negative it indicates the market will be in a long-term downtrend. In a flat market, the technical chart will not show a price swing and the ASI will be close to zero.
If ASI values fluctuate between positive and negative, or remain near zero, it is an indication that the market is currently flat and you may consider using other technical indicators.
How to trade using the Accumulative Swing Index
The ASI is best used as a tool to confirm a price pattern. Traders can use the ASI as part of their routine trading strategy by taking it as a price signal, opening a long position when the index value moves up or closing a long position and going short when the value moves down. A choppy ASI chart provides a clearer price signal than a stable indicator.
Knowing how to recognise trading patterns can help you to make more sophisticated buy and sell decisions and increase the profits you generate in your portfolio.
If you follow the ASI in your trading, you should be aware of the limitations of using it as an index. In some cases, the asset price may not reverse direction when the ASI pattern ends. However, you can still make profitable trades by waiting for the indicator to catch up and turn in the new direction before opening or closing your position.
Limitations of using the Accumulative Swing Index
You should not use the ASI as your only trading indicator, because it will not provide you with a full picture of the market. It should be used as part of a broader technical analysis strategy that also takes into account other indicators and data points. As the ASI gives you a price signal, try supplementing it with volume-based indicators for additional information.
Stop-loss orders should be considered for each of your trading positions to limit your losses in the event that the prices move strongly in the opposite direction.
