The Accumulative Swing Index (ASI) was originally developed by J. Welles Wilder and described in detail in his book “Concepts in Technical Trading” published in 1978. The ASI was derived from Wilder’s swing index (SI), which was developed to assess price change direction and strength relative to a market price swing.
In this article, we examine how to interpret the ASI meaning correctly, how to compute the indicator and the pros and cons of using it in your forex trading strategy. Keep reading to find out more about the various ASI market applications and how forex traders can benefit from using this indicator.
What is Accumulative Swing Index (ASI)?
The ASI indicator is based on the idea that exchange rates and trading volume are interrelated and can provide information about a trend’s strength. The ASI is among the various forex indicator options used by technical currency traders to get a more detailed picture of a currency pair’s movements. Important applications of the ASI include helping identify trends and potential trend reversals in the forex market.
To better understand the ASI, it helps to first take a look at the SI and how it is best used. The SI measures the strength of an exchange rate movement and requires data from two adjacent candlestick bars drawn on a candlestick chart. Specifically, the SI calculation requires the current high and low of the current candlestick, the close of the previous candlestick and the previous swing index number.
To calculate the ASI, you take the cumulative total of the SI and then add or subtract the number from the previous ASI value depending on whether the bar was an up or down bar. The ASI indicator appears as a line on a chart, with the line moving above or below the zero value line.
If the ASI value is positive, this would indicate a bullish trend, while a negative value would mean that the trend was bearish. When the line crosses the zero value level on either the upside or downside, this could signal a possible trend reversal.
Some forex technical traders use the ASI combined with other technical analysis indicators before taking a position in the market. For example, a trader may wait for the ASI to cross over the zero value line along with another bullish indicator before going long a currency pair. In the same manner, the trader would wait for the ASI to drop below the zero value line along with another bearish indicator before going short a currency pair.
Understanding Accumulative Swing Index as a Forex Trading Tool
The Accumulative Swing Index makes a useful tool for forex traders looking to identify trends and potential trend reversals in the market. The ASI is typically used as a trading tool by forex traders to help confirm the direction of the trend.
The ASI can be plotted as a line chart with the x-axis representing the time period and the y-axis representing the ASI value. An upward-trending ASI suggests that more buying pressure exists than selling pressure, while a downward-trending ASI indicates the opposite. A flat or neutral ASI indicates that buying and selling pressures are balanced.
If the ASI lies above its zero line, this indicates that the overall trend is upward, so traders may consider going long the currency pair. Conversely, if the ASI sits below its zero line, then this indicates that the trend is downward, so traders may consider going short the currency pair.
The ASI can also be used along with other technical analysis tools like moving averages and support and resistance levels to identify potential trade entry and exit points. For instance, a trader may look for the ASI to cross above a moving average or a resistance level as confirmation of a bullish trend and to suggest a potential entry point for a long position. Similarly, a trader may look for the ASI to cross below a moving average or a support level as confirmation of a bearish trend and to set up a potential entry point for a short position.
A potential drawback of using the ASI as a forex trading tool is that it can be prone to false signals, especially during periods of low volatility or when the forex market is choppy. Traders will therefore generally want to use the ASI in combination with other technical analysis tools and consider market conditions and fundamental factors carefully before making trading decisions based on the ASI.
How to Generate the ASI
The ASI’s value is calculated for a currency pair based on the volume traded and on the difference between the open, high, low and close exchange rates. The ASI computation assigns a value of +1 or -1 depending on whether the close is above or below the midpoint of the high and low for the day.
Determining the ASI then requires adding or subtracting a value based on the volume traded for the day. If the volume is higher than the previous day, then the ASI’s value will be greater than the previous day's value. If the volume is lower, then the ASI’s value will be lower than the previous day's value.
The Accumulative Swing Index is calculated for a currency pair using the following steps:
- Calculate the R-value: This is the difference between the pair’s current exchange rate and its previous exchange rate.
- Calculate the swing index (SI) value for the current period: You do this using a formula detailed below that takes into account the R-value, the previous SI value and the previous period's closing price.
- Calculate the ASI value for the current period: This is done by adding the SI value to the previous period's ASI value.
- Repeat these steps for each period: You will use the previous period's ASI value to calculate the ASI value for the current period.
To compute the SI value to use in step No. 2 above, you can use the following equation developed by Wilder:
SI={50×[Cy−Ct+12(Cy−Oy)+14(Ct−Ot)]/R}×K/T
Where:
SI = Swing index
Ot = Today’s open
Oy = Yesterday’s open
Ht = Today’s high
Hy = Yesterday’s high
Lt = Today’s low
Ly = Yesterday’s low
Ct = Today’s close
Cy = Yesterday’s close
K = The greater of Hy−Ct and Ly−Ct
R = Varies based on the relationship between Ct, Hy and Ly as explained below.
T = The maximum amount of market change seen for the trading day.
The swing index calculation incorporates differences between consecutive daily closing and opening exchange rates to determine the variable R. You obtain the R-value by determining the greater of the three following differences:
- If (Ht−Cy) is greater, then R = Ht−Cy−12(Lt−Cy)+14(Cy−Oy).
- If (Lt−Cy) is greater, then R = Lt−Cy−12(Ht−Cy)+14(Cy−Oy).
- If (Ht-Lt) is greater, then R = Ht−Lt+14(Cy−Oy).
If you prefer not to take the time to compute the Accumulative Swing Index yourself, you can instead use a trading platform or charting software that calculates it for you. To do this, you will typically open a chart of the currency pair you want to compute the ASI for.
You can then add the indicator to the chart in the indicator box as shown in the chart below and set its time period parameter to your desired level. The ASI can now be used to analyze the trend for a currency pair and look for potential reversals.
Daily exchange rate candlestick chart for the USD/JPY showing the ASI in blue in the indicator box. Source: MetaTrader5.
Interpreting the ASI
The Accumulative Swing Index is usually used to identify trends and potential market reversals. When interpreting the ASI, you want to keep the following points in mind:
- Trends: Positive ASI values indicate that an uptrend is underway, while negative ASI values indicate a downtrend is progressing.
- Crossovers: When the ASI crosses above its zero line, this is a bullish signal of a potential uptrend. When the ASI falls below its zero line, this sends a bearish signal of a potential downtrend.
- Trend strength: The direction and slope of the ASI line indicate the strength of the trend. For example, a more slanted upward slope suggests a stronger uptrend.
- Reversals: If the ASI is trending higher while the currency pair’s exchange rate is declining, the divergence can signal a bullish reversal. Conversely, if the ASI is trending lower but the exchange rate is rising, it can indicate an upcoming bearish reversal.
The ASI is typically used along with other technical and fundamental analysis tools. When interpreting the ASI, forex traders looking to make sound trading decisions should also consider market conditions, underlying trends, economic data releases and news events.
How to Trade Forex Using the ASI
The ASI can be a useful technical analysis tool to help currency traders identify trends and potential trend reversals as they arise in the forex market. Here are some steps you can take to trade forex using the ASI.
- Step 1: Identify the trend direction. Start by analyzing the ASI to determine the direction of the trend. Positive values of the ASI indicate an uptrend, while negative values indicate a downtrend.
- Step 2: Confirm the trend with other indicators. You can use other technical analysis tools like moving averages to confirm the trend identified by the ASI and its direction. This can help reduce the risk of trading on a false signal.
- Step 3: Look for potential trade setups. Now look for potential trade setups based on the ASI. If the ASI indicates an uptrend in a currency pair, consider buying on pullbacks to support levels or after a bullish breakout is observed.
- Step 4: Manage risk. Make sure to use sound risk-management techniques like stop losses and sensible position sizing methods to protect your account against unpalatable losses. You will also want to monitor your position closely while it remains open.
- Step 5: Exit the trade. You can continue to monitor the ASI and other technical indicators to determine when exiting the trade makes sense. If the ASI starts to indicate a potential trend reversal is coming, you can close out the trade to lock in your profits or reduce losses.
Advantages of Using the Accumulative Swing Index
As a technical analysis tool, the Accumulative Swing Index can provide several advantages to forex traders. These include:
- Identify trends: The ASI can help traders identify trends in the market and determine their direction. Positive ASI values indicate an uptrend, while negative values indicate a downtrend.
- Signal trend reversals: The ASI can also help traders identify potential trend reversals. For example, if the ASI is trending higher while the price of the asset is trending lower, this can be a signal of a potential bullish reversal. Similarly, if the ASI is trending lower while the price of the asset is trending higher, this can be a signal of a potential bearish reversal.
- Confirm other indicators: The ASI can be used along with other technical analysis tools to confirm trends and reduce the risk of trading on false signals.
- Customizable parameters: The ASI can be customized to be more or less sensitive, which lets you adjust the indicator to fit your specific trading preferences and desired time frame.
- Versatility: The ASI is a versatile indicator that can be applied to just about any financial market.
Disadvantages of Using the Accumulative Swing Index
While the Accumulative Swing Index offers several significant advantages to forex traders, it also has some potential disadvantages you will want to take into account when deciding whether to use it in your currency trading strategy. These include:
- Delayed signals: Because the ASI is a lagging indicator based on historical data, it may not provide the real-time information about market trends you require. It can also result in delayed signals that can cause you to enter trades too late or miss out on trading opportunities altogether.
- Subjectivity: You need to perform some analysis to interpret the ASI, which can introduce an element of subjectivity into your trading strategy that some consider undesirable.
- False signals: The ASI can produce inaccurate signals that can lead to losing trades. Traders following the ASI generally need to use proper risk-management techniques and confirm ASI signals with other indicators.
- Best used with other indicators: Relying too heavily on the ASI can be risky because of the possibility of false signals, so traders usually use the ASI with other technical analysis tools when making trading decisions.
- Less effective in certain market conditions: The effectiveness of the ASI falls during periods of low volatility and when no clear trend exists in the market.
Should You Use the ASI in Your Trading Strategy?
Whether to use the Accumulative Swing Index in your forex trading strategy depends on your trading style, preferences and goals. Many technical traders find the ASI helpful for identifying trends and potential trend reversals.
Because the indicator can give false signals, it seems best to use the ASI along with other technical analysis tools and market analysis techniques. Also, if you do not use technical analysis much and prefer to rely mainly on fundamental analysis, the ASI may not be very useful to you.
Whether to use the ASI in your trading strategy is a personal decision. If you are interested in incorporating the ASI into your trading strategy, you can test it first in a demo account to see whether it fits well with your trading style and looks like it will boost your profitability.
Frequently Asked Questions
What is the ASI trading strategy?
An ASI trading strategy is a technical trading method that uses the Accumulative Swing Index to identify trends and potential trend reversals in the market. Many traders confirm the ASI’s signals with other technical indicators before trading.
How is ASI calculated?
Many forex traders use their trading platforms to calculate the ASI. If you prefer to do the ASI calculation yourself, you can first compute the R-value, which is the difference between the current and previous period’s exchange rate. You then calculate the swing index value for the current period using a formula that takes into account the R-value, the previous SI value and the previous period’s closing price. You can then compute the ASI value for the current period by adding the SI value to the previous period’s ASI value. These steps are repeated for new periods.
How do you interpret the Accumulative Swing Index?
The Accumulative Swing Index (ASI) is interpreted based on its position relative to the zero line. When the ASI is above the zero line, it indicates a bullish trend, but when it lies below the zero line, it indicates a bearish trend. The direction and slope of the ASI line also indicate the strength of the trend. A positive divergence between the ASI and the exchange rate can indicate a potential bullish reversal, while a negative divergence can indicate a potential bearish reversal.