Accumulative Swing Index (ASI) – Rules, Settings, Strategy, Returns

The financial markets seem to move in a highly chaotic way, but at a larger scale, the movements follow a trending pattern that can be picked out with the right tool — one such tool is the Accumulation Swing Index (ASI). What do you know about the ASI?

The Accumulative Swing Index (ASI) is a technical analysis indicator used to assess the overall trend in the price swings of an instrument over the long term. It gauges the direction and strength of the market by accumulating the values of the swing index for each period over time. Rising values indicate an uptrend, while falling values suggest a downtrend.

In this post, we will take a look at most of the questions you may have about the Accumulation Swing Index: what it is, how it works, and how you can improve your trading strategies with it. Read on!

Key takeaways

• The Accumulative Swing Index (ASI) is a long-term technical indicator that tracks overall trend direction and strength by accumulating Swing Index values over time.
• It evaluates price swings by comparing current price data to the previous period’s prices, helping traders see a broader market perspective.
• A rising ASI indicates an uptrend, while a falling ASI suggests a downtrend, helping to identify trend direction.
• Traders use ASI trendlines to anticipate potential support and resistance levels; a break in the ASI trendline can signal a possible market reversal.
• The ASI smooths out short-term fluctuations, providing a clearer view of long-term market movements.
• QuantifiedStrategies.com backtests a Swing Index trading strategy. We also backtest the Accumulative Swing Index.
• More indicators are available if you click here: best technical trading indicators.

What is the Accumulative Swing Index (ASI)?

The Accumulative Swing Index (ASI) is a technical analysis indicator used to assess the overall trend in the price swings of an instrument over the long term. It gauges the direction and strength of the market by accumulating the values of the Swing Index for each period over time.

The swing index compares the current price data points with the previous period’s prices to assess short-term price swings. So, its cumulative sum, the ASI, shows the direction of those swings, providing traders with a broader perspective of the market movements. In other words, the ASI is used to see the long-term picture of the market, as it smoothes out the swing index values.

Traders use it to assess the direction and strength of trends, as well as potential price reversals. When the ASI value is rising, the long-term trend is up. If the ASI value is falling, the long-term trend is down. Traders also apply trendlines to the indicator to not only decipher the trend but also anticipate potential support/resistance. The indicator breaking its own trendline marks a shift in the market direction — a market reversal.

Stwing Index trading strategy – rules, settings, and returns

Let’s backtest a trading strategy that has the following trading rules:

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

(Please look at the code below if you are unsure of the trading rules.)

It’s not many trades.

If we include 0.03% commissions and slippage per trade – 0.06% for a round trip) we get the following table if we sell N days after entry:

There are very few trades.

This is the code we used for the backtest (Amibroker):

THIS SECTION IS FOR MEMBERS ONLY. _________________ BECOME A MEBER TO GET ACCESS TO TRADING RULES IN ALL ARTICLES CLICK HERE TO SEE ALL 400 ARTICLES WITH BACKTESTS & TRADING RULES

Who developed the Accumulative Swing Index?

The Accumulative Swing Index was developed by the famous J. Welles Wilder Jr. as an improvement of the swing index to better understand the long-term direction of the price. He introduced the indicator in his 1978 book titled: “New Concepts in Technical Trading Systems.”

A renowned technical analyst and an author of many trading books, Wilder is an American mechanical engineer turned full-time market trader and researcher. He is well known in the trading community for creating many other popular indicators, such as the Relative Strength Index (RSI) and the Average Directional Index (ADX). He once made this statement about indicators:

“Somewhere amidst the maze of Open, High, Low, and Close prices is a phantom line that is the real market.”

How does the Accumulative Swing Index work in trading?

In trading, the Accumulative Swing Index works as a tool for assessing the direction and strength of the trend in price swings over time. It cumulatively sums the swing index values of each period to gauge the direction and strength of the market.

While the swing index compares the current price data points with the previous period’s prices to assess short-term price swings, the ASI accumulates the values of the swing index for each period over time to show the long-term trend of those price swings. This offers traders a broader and more comprehensive perspective of the market movements. To put it differently, the ASI smoothes out the swing index values to show the long-term picture of the market.

It can tell traders whether there is a trend in the market, the direction and strength of the trend, and when the trend may be about to reverse. If the ASI value is rising, the long-term trend is likely up, and if the ASI value is falling, the long-term trend is to the downside. When trendlines are applied to the indicator, traders can use that to identify a market reversal — the indicator breaking its own trendline marks a change in the market direction.

Why is the ASI useful for traders?

The ASI is useful for traders because it provides them with a more comprehensive view of the price swing movements. It accumulates the swing index values of individual price swings to show the long-term picture of the market. As such, traders can use it to know whether there is a trend in the market, the direction and strength of the trend, and when the trend may be about to reverse.

When the ASI value continues to rise, the long-term trend is likely to the upside. Likewise, when the ASI value continues to fall, the long-term trend is to the downside. Traders also apply trendlines to the indicator for a better view of the trend and to identify a market reversal. When the indicator breaks out of its own trendline, it signals a change in the market direction.

How is the ASI different from other swing indicators?

The ASI is different from other swing indicators in that it is a cumulative indicator while other swing indicators are usually not cumulative in their calculations. This means that the ASI values keep increasing or decreasing if the price movements are sustained in one direction.

Given its cumulative nature, the ASI can provide information about the long-term direction of the market trend and can be used for assessing the direction and strength of the trend identification. Other swing indicators, however, only provide information about individual short-term price swings and, thus, are not useful for assessing the main trend.

What are the key components of the Accumulative Swing Index?

The key components of the Accumulative Swing Index are as follows:

• Each period’s swing index: This calculates the swing index value of each period, which is measured by comparing the price data points — open, high, low, and close — of the current period to those of the period before it.
• The accumulated value: The value is obtained by adding the current period’s swing index value to the previous period’s ASI value. This is done for every new period such that the ASI of any new period is the sum of the accumulated swing index values before it and the swing index value of that period.

How is the Accumulative Swing Index calculated?

The Accumulative Swing Index is calculated in two steps:

Step 1: Calculating the Swing Index

The Swing Index is calculated using the following formula:

Swing Index = 50 × {[(Cy – Ct) + (0.5 × (Cy – Oy)) + (0.25 × (Ct – Ot))] / R} × K /T

Where:

Oy = Yesterday’s Open

Ot = Today’s Open

Cy = Yesterday’s Close

Ct = Today’s Close

T = the maximum amount of price change for the day

K = The larger of (Hy – Ct) and (Ly – Ct)

Hy = Yesterday’s high

Ly = Yesterday’s low

Lt = Today’s low

Ht = Today’s high

R: Varies based on the largest of the following:

Ht – Cy: Today’s High minus Yesterday’s Close

Lt – Cy: Today’s Low minus Yesterday’s Close

Ht – Lt: Today’s High minus Today’s Low

Step 2: Calculating the Accumulative Swing Index (ASI)

The ASI is calculated with this formula:

ASI = Previous ASI + Current Swing Index

Can the ASI predict trend reversals?

Yes, the ASI can predict trend reversals in two ways. The first is through a divergence signal which forms when the indicator swings and the price swings are out of sync — if the price makes a new high or low, but the ASI fails to do the same, it may indicate that the current trend is losing momentum and could potentially reverse.

Another way is by applying a trendline to the swings of the indicator. When the indicator breaks through the trendline, it suggests that the trend is reversing.

How do traders use the ASI to analyze market trends?

Traders use the ASI in different ways to analyze market trends. Primarily, they check the direction of the indicator — if the ASI value is rising, the trend is to the upside, and if the value is falling, the trend is to the downside. The magnitude of the value suggests the strength of the trend.

Sometimes, traders can apply trendlines to the indicator swings. The direction of such trendlines suggests the direction of the price trend — an upward-pointing trendline suggests an uptrend in the market, while a downward-pointing trendline suggests a downtrend.

What timeframe is best for using the ASI?

The best timeframes for using the ASI will depend on your trading style and the result of your backtesting. If you are a day trader, the options for your trading timeframe will be the hourly, 30-minute, and 15-minute timeframes. To know the particular timeframes that work best for day trading, you have to backtest the various options to know the one that offers the best performance.

Similarly, if you are a swing trader, you may have to focus on the 4-hourly and daily timeframes and backtest them to find the right one for your strategy.

Can the ASI be applied to all asset classes?

The ASI can be applied to all asset classes since the indicator is calculated using the price data and all asset classes post reliable price data. This is unlike volume-based indicators that cannot be applied to certain markets, such as the spot forex market, where volume data is unreliable because there is no central exchange.

The ASI uses only the price data and, therefore, can be applied to all assets, including forex, cryptos, stocks, bonds, and commodities.

How can I interpret ASI signals in my trading strategy?

To interpret ASI signals in your trading strategy, you will need to check how the indicator is moving. If the ASI is moving up, the trend is to the upside, and you can look for buy setups. On the other hand, when the indicator is moving south, the trend is to the downside, so you look for sell setups.

You can also check for divergences from the price action, which may suggest potential trend reversals.

What are the advantages of using the ASI in trading?

The advantages of using the ASI in trading include:

• The indicator can help you identify a trend, check its direction, and gauge its strength
• You can use it to confirm a price breakout when the indicator spikes during a breakout
• You can use its divergence signals to anticipate a trend reversal and the break of its own trendline to confirm the reversal

How can the ASI help with confirming breakouts?

The ASI can help with confirming breakouts by showing a spike in its value when a breakout happens. And, this spike must happen in the direction of the breakout. That is, if the price breaks above a triangle chart pattern, for example, the ASI must have a sudden huge rise to confirm there is strength in the breakout.

The opposite is true for a downward break below a support or a chart pattern — the ASI should make a sudden huge drop to confirm there is strength in the breakdown.

What are common mistakes traders make when using the ASI?

The common mistakes traders make when using the ASI include the following:

• Some of them use it to trade the markets without first creating a strategy with clear entry and exit rules.
• They may trade strategies that have not been backtested to prove their profitability.
• Some trade the indicator without supporting it with other forms of analysis.
• Some trade without having a risk management plan.

Is the Accumulative Swing Index reliable in volatile markets?

Whether the Accumulative Swing Index is reliable in volatile markets will depend on the direction of the market. If the market is trending in one direction, the ASI will rise or fall with greater strides when the market volatility is high than when the volatility is low, but its direction will remain sustained in that of the trend.

However, when the market is moving sideways or consolidating, higher volatility will make the ASI spike in different directions.

Can the ASI be combined with other technical indicators?

Yes, the ASI can be combined with other technical indicators to improve its signals. However, you have to combine it with indicators that complement it, depending on how you use the indicator.

For instance, if you want to trade short-term swings, you can combine the ASI with momentum oscillators, such as the Swing Index, RSI, or stochastics, which can help you make more precise entries. For breakout trades, you may combine the ASI with volume indicators, such as the Chaikin Money Flow.

What trading strategies work best with the ASI?

Some of the trading strategies that work best with the ASI include:

• Trend-following strategies: These are strategies that try to identify a trend early and ride it to its end. The ASI can be useful in creating these types of trading strategies because it can help spot the trend and gauge its strength.
• Breakout strategies: These are strategies that aim to enter a trade when the price breaks out of a chart pattern or support/resistance. The ASI can help confirm if there is strength in the breakout.
• Short-term impulse swing trades: These are trades that aim to capture the individual impulse swings in the trend direction and exit the market before the next pullback. With the ASI showing the trend direction, a momentum oscillator, such as the RSI or Swing Index can be used to spot and trade the individual impulse swing in the trend direction.

How does the ASI compare to the Average Directional Index (ADX)?

Compared to the Average Directional Index (ADX), the ASI cannot only spot a trend and gauge its strength but also show the direction of the trend. The ADX, on the other hand, only tells you whether there is a trend and how strong the trend is.

In other words, the ADX is a non-directional trend indicator, whereas the ASI is a directional trend indicator. While you may use the ASI alone to find the trend, you cannot use the ADX alone to know where the trend is headed.

How can I avoid false signals using the ASI?

To avoid false signals when using the ASI, you may have to combine it with other indicators that can improve its signal or use other forms of analysis to augment it. The indicators you use will depend on the ASI signal you are interested in.

For instance, if you want to avoid false breakout signals, you may use volume indicators to assess the amount of volume behind a breakout move.

Can beginners use the ASI effectively in trading?

Yes, beginners can use the ASI effectively in trading if they learn how the indicator works and how to use it to create robust trading strategies. The first step is to use resources like this one to learn about the indicator.

Then, they can create a demo account and practice with the indicator, learning how to identify a trend, confirm a breakout, and anticipate a reversal. Next, they will use the indicator to create trading strategies with clear entry and exit and backtest them.

How do I set up the ASI on a trading platform?

To set up the ASI on a trading platform, go to the indicator section of the platform and search for the ASI. If the indicator is preinstalled in the platform, you will find it there. Simply double-click on it to attach it to your chart.

If the ASI is not preinstalled on the platform, get a programmer to code a custom version for your trading platform.

What is a good ASI value to enter or exit a trade?

A good ASI value to enter or exit a trade will depend on the trading strategy and its entry and exit rules. There is no universal good ASI value for every trade. First, create a trading strategy and define the entry and exit rules for the strategy.

Backtest these rules to be sure they offer an edge in the market.

How can I backtest the Accumulative Swing Index?

To backtest the Accumulative Swing Index, follow these steps:

1. Formulate a trading strategy with the Accumulative Swing Index and the parameters or settings you need to adjust
2. Code the strategies into trading algorithms
3. Specify the markets you want to backtest the strategy
4. Gather the data you need for the backtesting
5. Divide the data into in-sample and out-of-sample data
6. Run your backtesting on the in-sample data and optimize with the out-of-sample data, adjusting your parameters as needed
7. Evaluate the results of your backtesting

How can the ASI improve my overall trading performance?

Yes, the ASI can improve your overall trading performance if you use it the right way. You can use it to identify more suitable markets for your trading strategy or anticipate a reversal in the market trend.

Whichever way you use it, make sure it complements the signals from your trading strategy.