Time-Based Trend Calculations
The purpose of all trend identification methods is to see past the underlying noise in the market, those erratic moves that seem to be meaningless, and find the current direction of prices. Because there may be more than one trend at any one time, caused by short-term events and long-term policy, it is likely that one trader will search for the strongest, or most dominant trend, while another will seek a series of shorter-term moves. Each objective has both benefits and compromises. The technique that is used to uncover the particular type of trend depends upon whether any of the trend characteristics are known. Does the stock or futures market have a clear seasonal or cyclic component, such as the travel industry or coffee prices; or, does it respond to long-term monetary policy because of debt or direct investment in interest rates? The more you know about the reasons why prices trend, the better you will be able to find the most reliable calculation for separating the price direction from market noise.
Chapter 6 produced models by finding relationships between two or more price series, or just one series and time. Once you know that there is a fundamental relationship between data, based on measuring the properties of dependence and correlation, a formula can be found that expresses one price movement in terms of the other prices and economic data. The predictive qualities of these methods are best when applied to data that has been ...