Barros Swings – Examples of Their Use

In the first part of this article, I explained what Barros Swings are, how to construct them and some general principles for their use.  In this article, I’ll give an overview of how they fit into my trading methodology and some examples of their use.

I divide my trading approach into four key parts:

1. Price
2. Volume-Price Relationship
3. Sentiment
4. Time

Barros Swings form the foundation of the ‘price’ and ‘volume’ sections.  Before I take a trade, I ask myself a series of questions. The first is:

• What is the trend? Is it likely to continue or change?

The answer to this provides my strategy for the trade: whether I go long or short or stand aside.  In answering the question, I turn firstly to Barros Swings.

The answer to the trend question depends on both the higher and lower timeframe structures as well as that of the trader’s timeframe. For example, let’s say that I am trading an 18-day swing, to answer the question, I look at two higher timeframes, and two lower timeframes.  In each case I want to consider:

     a)    Are higher timeframe swings likely to change direction? A change in the higher timeframe line direction tends to cause a change in trend in the trader’s timeframe. Some considerations:

               i.    Is the higher timeframe line direction statistically overbought or oversold? Barros Swings allow me to define what a ‘normal’ impulse move is and what a ‘normal’ correction is (not only for price but also for time).
               ii.    Is the market at a potentially higher timeframe support or resistance zone?

     b)    What does the average volume per bar analysis show? Are we seeing signs for continuation or change in the current line direction?

     c)    I ask the same questions of the trader’s timeframe and add:
               i.    Do we have any potential change in trend patterns?

     d)    Turning to the lower timeframes,

          In the first lower time, I focus mainly on the probability whether a change in trend pattern may be forming and how that change in trend pattern will impact the trader’s timeframe. 

               i.    In the second lower timeframe, once I believe that an entry pattern is near, I focus mainly on the volume-range relationship of individual bars.

• Once I have a strategy, I look for zones, setups, triggers and initial stops. Barros Swings play a role in zones, setups and initial stops.

• Barros Swings do not play a role in the other factors I consider before taking a trade – position sizing and the attractiveness of the trade.

Yes I know, it’s a bit airy-fairy. But you need to be aware of the above to make sense of the example that follows; let’s have a look at Gold. Let’s say I am trading the 18-day trend:

• My higher timeframes are the 12-month swings (yearly trend) and the 13-week swings (quarterly trend).
• My lower timeframes are the 5-day swings (weekly trend) and the daily bars.

I start the analysis with an overview of the context.  I use this to form a perspective.

Figure 1 is a monthly chart of spot gold since 1800.

FIGURE 1: Spot Gold 1800 to Feb 2011
(Charts through the courtesy of ‘thechartstore.com’)

What do I get from this chart? Well firstly, I notice that:

1.    The free market history starts Aug 1970.
2.    I then make an assumption that WAVE C  = WAVE A (or 50% WAVE A) and I work out a projection for the WAVE C. Note that this is not a robust projection but only a way to provide a perspective.
3.    So far the angle of ascent of the 1970 to 1980 is steeper than that from 1999 to date.

The next chart I look at for perspective is the same chart adjusted for inflation, Figure 2.

FIGURE 2: Spot Gold 1800 to Feb 2011 (Adjusted for Inflation)

This chart shows:

1.    If Gold is to equal the 1980 highs, we’ll see at least 2406.
2.    The current move (2001 to date) is lagging the move from 1970 to 1980. If WAVE C = WAVE A in momentum, then we may see an increase in momentum.

The technical picture is then compared with my analysis based on Austrian economics. I won’t go into it here; suffice to say that the two complement one another.

I now turn to the 12-month swings.

The higher timeframe above the 12-month is the 30-month.  I start the 12-month swing analysis from the swing extreme of the 30-month.

FIGURE 3:  12-M Barros Swing
(Charts through the courtesy of ‘market-analyst.com')

Figure 3 shows that while the 12-month is not statistically overbought, it is at Square resistance. It is unlikely that in this context the minor square will turn the 12-month swing down (possible but unlikely). But the Square Resistance could easily turn the 13-week line down.

So the questions that arise are:

1.    Does the Volume-Range bars – weekly and daily – support continuation or change of the line direction, and
2.    Do we have any potential change in trend patterns in the 13-week or 18-day?

Figure 4 shows that the 13-week swing line is statistically overbought.  The normal impulse move is 55% to 72%; the current swing line shows an increase of 108.8%.  Thus we have a potential  for a 13-week line turn down.  In turn this suggests a change in trend in the 18-day swing.

FIGURE 4:  13-week Barros Swings

Turning now to the 18-day swings:

1.    Figure 5 shows that at the potential 18-d high at ‘C’, we have a new high on much lower volume than the high at ‘A’.
2.    The average volume per bar on the swing down AB is much higher than that of the swing up BC.
3.    One fact  makes the bearish picture less than perfect: the last impulse move up (X to X1) had less volume than BC. A ‘perfect‘ picture would have seen volume per bar below 13,680,670.

What this suggests is that we’ll see one more push above ‘C’. If that push fails to attract buyers (up moves that are accompanied by ‘normal range’ and volume per bar at or above 23,030,000, then we can expect to see a bearish conviction close below the bottom of the Primary Sell Zone, 1423 (Figure 6).
4.    Finally notice that the bar of Friday, March 4 had normal range and below normal volume. This suggests that sellers were absent and reinforces the idea that we’ll see at least the test of the highs at ‘C’.

5.    Initial stop placement would be considered once it becomes clear a trigger is likely to occur.

FIGURE 5:  18-day Barros Swings

FIGURE 6:  18-day Barros Swings

So there you have it: a brief exploration on how to use Barros Swings.

Ray Barros

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