Trading Systems and Methods, + Website, 5th Edition

CHAPTER 7

Time-Based Trend Calculations

The purpose of all trend identification methods is to remove the underlying noise in the market, those erratic moves that seem to be meaningless, and find the current direction of prices. But trends are somewhat dependent upon your time horizon. There may be more than one trend at any one time, caused by short-term events and long-term policy, and 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. There is no “right” or “wrong” trend but a choice of benefits and compromises.

The technique that is used to uncover a particular trend can depend upon whether any of the underlying 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 based on the cost of servicing debt or interest income? If you know more about the reasons why prices trend, you will be able to choose the best method of finding the trend and the calculation period.

Chapter 6 used regression to find the direction of a single price series (based on one market and time), the relationship between two markets, and the ranking of both similar and diverse markets. Once you know that there is a fundamental relationship between data, a formula can be found that expresses one price movement in terms of the other prices and economic data. The predictive ...