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 Stocks & Commodities V. 35:09 (22–25): An Early Warning System, Part 2 by Mike Slattery

Swing Signals For the Day & Swing Trader

An Early Warning System

Part 2

Some trading signals are better than others. In this second Targeting the window of opportunity
part of a three-part series, we’ll describe a filter that’ll help The EWS produces two primary signals that flank this trading
identify optimal swing trading buy/sell points. window. The first signal serves as a warning or alert, indicat-
ing that your stock is approaching a potential turning point

L
by Mike Slattery (see Figure 1). The second signal serves as confirmation that
this turning point has occurred and that the stock or equity has
Traffic light: siridhata/shutterstock

ast month in part 1, I introduced my early warning
system (EWS), which combines two indicators of
different origins and defines a window of opportu-
nity for a trade. Here in part 2, I’ll introduce a swing
trading system with the EWS as its foundation that
produces relative reference points for a definitive
and optimal entry/exit signal within that window.
crossed over or under the short-term moving filter that produces
the horizontal, center demarcation line for this indicator. These
two flags define a window of opportunity. The distance between
these two indications define the size of this window, which can
be as small as one day and as large as several weeks.
Pattern recognition is utilized to identify when these two
signals have been triggered within the array of columns pro-

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 35:09 (22–25): An Early Warning System, Part 2 by Mike Slattery
trading strategies

duced by the EWS. Visually, these patterns can be all

but indistinguishable because of the small and subtle
changes that can trigger them. For this reason, I use
unique flags in the form of distinctive dots to visually
communicate to the trader when these patterns have
developed. A legend of these dots is provided at the
bottom of Figure 1.

The Goldilocks paradigm

The problem with the two EWS indication dots is by
design. The first dot often occurs significantly before
a trading opportunity and the second dot often occurs
considerably after the most profitable entry or exit
opportunity has passed. The Swing•Genie indicator
described in this article aims to fill this window of
opportunity, generating a “Goldilocks” dot that is just
right. Swing•Genie displays all three indicator dots,
providing the trader with a minimum of three signals
or flags that indicate to the trader:

stockdotgenie.com
1. A trading opportunity is on the horizon
2. An optimal entry/exit opportunity has
occurred, and
3. A buy/sell decision is confirmed as the trend FIGURE 1: EARLY WARNING SYSTEM. The dots were generated by the Swing•Genie early
continues, and your last chance for a profit- warning system and have been duplicated on the candlestick chart at the top to show the
able entry/exit opportunity is upon you. relationship between the indicator and the resulting entry & exit signal positions.

Each one of these three indicators is designed to incre-
mentally and progressively increase the trader’s confidence
that the decisions he has made are correct by way of the ap-
pearance of the next indication dot. The appearance of each
additional incremental signal validates the prior dot.
In the final article in this series I will provide you with a
structurally similar indicator utilizing volume as a final ad-
ditional validation/confirmation of your trading decisions.
This volume price projection indicator is shown at the
bottom of Figure 1.
rocket on its intended trajectory. If you have ever watched a
rocket take off, the control generated by the combination of
the COG calculation and vector-directed thrust produced by
the rocket’s engines generates a path that often produces a
perfect parabolic swing. (See the left side of Figure 3.) The
analogy here is that the buying and selling over time provides
the equity’s fuel, driving its vector-directed path, and the COG
provides you with an excellent indication of exactly where

Combining center of gravity and

Arnaud Legoux moving averages
Just as with the EWS indicator dots, the Swing•Genie
dot is also produced by combining several indicators.
And again, just as one indicator used in the EWS was
from the work of John Ehlers, for the Swing•Genie dot,
the first three indicators in the combination are from
Ehlers’ work.
The first is the center of gravity (COG) (Figure 2, gold
line) and it produces a moving filter indicator that heavily
weights the most extreme and most current values in
the stream of data within the window of the indicator.
The COG is an actual rocket science calculation that
is utilized to determine how the center of gravity of a
rocket is changing as its fuel burns off. This is a critical Figure 2: Center of gravity (COG). The COG indicator is shown for an eight-day
point of information because the vectoring of the thrust period on a daily chart of American Express (AXP). The COG calculation heavily weights
the most extreme and most current values in the data within the window of the indicator.
must constantly change, incorporating and adjusting The COG is useful for indicating where within a parabolic path a tipping or turning point
to this vital point of information in order to keep the has occurred.

Copyright © Technical Analysis Inc. www.Traders.com

 Stocks & Commodities V. 35:09 (22–25): An Early Warning System, Part 2 by Mike Slattery
The goal of the filter is to isolate
optimal swing/daytrading buy/sell
targets, which reside between
the early warning signals and the
crossover (last opportunity) signal.
in this parabolic path your equity currently resides. Where
COG really excels, though, is determining and indicating
where within this parabolic path tipping or turning points
have occurred (Figure 2).
Ehlers’ passband is again utilized here by taking a longer
COG period of 10 days, utilizing the candle’s body size as
its input and then subtracting a short period of six days us-
ing only the close of the day. The result is a tight tracing of
the stock’s price with an emphasis on the extreme values,
that is, the maximum apex and the minimum vertex of each
parabolic swing.
Finally, the Arnaud Legoux moving average (ALMA) is
utilized as a smoothing filter to slightly shift the weighting
from the COG passband filter in a selective and adjustable
manner to more current bars. This is desirable because COG
dramatically emphasizes the most current candle or bar as
well as large candles and strong deviations from within the
moving average.
Arnaud Legoux and Dimitrios Kouzis Loukas developed
ALMA. It’s a Gaussian distribution–shifted filter with an offset
that is not centered on the data’s window, but instead slightly
shifted to the more (not the most) current data. The ALMA
performs better in this situation because it takes into account
that the closer you get to the most current data, the higher the
uncertainty becomes. In this case, it’s true because the most
recent candle or bar is the one most heavily weighted by the
COG calculation and produces the most uncertainty about future
direction. Of course, we are also at a demarcation point between
what is known and what is unknown. This offset is adjustable so
the trader can balance between smoothness and responsiveness.
The data window size is also adjustable, allowing the amount
of data included within the filter to be dialed in.
The third parameter is sigma, which determines the filter’s
shape and is also adjustable, enabling the trader to widen or
shorten the filter’s focus. Another unique attribute of the ALMA
filter is the removal of small price fluctuations, enhancing the
trend by applying a moving filter twice—once from left to right,
and once from right to left. This process (called zero-phase
digital filtering) reduces noise in the signal, further reducing
the phase shift (price lag) commonly associated with moving
averages.
For anyone attempting to recreate this hybrid moving
filter, the settings that were used to generate the chart in
Figure 1 are:
Copyright © Technical Analysis Inc. www.Traders.com
• center of gravity (10) utilizing open + close / 2 as
the input
• center of gravity (6) utilizing only the close.
The output of the results from the COG passband filter were
then utilized as the input into the ALMA filter. ALMA set-
tings were as follows:
• window size (4)
• offset float (0.67)
• sigma float (1.1).
The result of driving two lengths of COG filters with two
different inputs through a passband filter and finally smooth-
ing that reactive output by using an ALMA filter provides the
trader with excellent responsiveness within a smooth output
signal with few artifacts or whipsaws, which, in my experi-
ence, produce highly reliable trading signals that accurately
indicate optimal entry and exit points.
The ultimate advantage of the ALMA component of this
filter is it gives the trader the ability to adjust the data window,
allowing the primary entry/exit signals to dial down more
exactly to the optimal spot between the early warning indica-
tor dot and the crossunder/crossover dot. Because this system
was initially designed for swing traders, whose timeframe is
normally a few days to a few weeks, the lookback periods are
short. ALMA improves the system’s ability to dial in these
short timeframe filters with as few whipsaw trade indications
as possible. These same attributes also enable daytraders to
alter trading timeframes to effectively utilize this indicator.
And still more to come
The goal of the Swing•Genie filter is to isolate optimal swing/
daytrading buy/sell targets, which reside between the early
warning signals and the crossover (last opportunity) signal. As
you can see in the chart of American Express (AXP) in Figure
Figure 3: ROCKET TRAJECTORY. This is an image from the Falcon 9 and SES-8
launch from SpaceX’s launch pad at Cape Canaveral. If you have ever watched a
rocket take off, the control generated by the combination of the COG calculation
and vector-directed thrust produced by the rocket’s engines generates a path that
often produces a perfect parabolic swing.
 Stocks & Commodities V. 35:09 (22–25): An Early Warning System, Part 2 by Mike Slattery
1, intuitive and profitable trading signals are generated.
The third and final article in this series on the volume
price projection (VPP) will offer another confirmational
indicator that helps to validate the signals provided by the
Swing•Genie early warning system. The combination of this
suite of indicators enables the technical swing/daytrader to
more confidently and profitably time and execute entry and
exit opportunities.
Michael Slattery is CEO of StockDot­Genie.com, a technical
analysis (TA) charting platform and educational website that
aims to shorten the learning curve for new and novice trad-
ers. He invests in equities based on technical, fundamental,
human, social, and Internet sciences. He can be reached at
StockDotGenie@dc.rr.com.
Further reading
Ehlers, John F. [2001]. Rocket Science For Traders: Digital
Signal Processing Applications, Wiley.
Copyright © Technical Analysis Inc. www.Traders.com
[2013]. Cycle Analytics For Traders: Advanced Techni-
cal Trading Concepts, Wiley.
[2016]. “Super Passband Filter,” Technical Analysis of
Stocks & Commodities, Volume 34: July.
[2014]. “Predictive And Successful Indicators,” Tech-
nical Analysis of Stocks & Commodities, Volume 32:
January.
Slattery, Michael [2017]. “An Early Warning System, Part 1”
Technical Analysis of Stocks & Commodities, Volume
35: August.
‡StockDotGenie.com
‡See Editorial Resource Index
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