Trading Systems and Methods, 6th Edition

CHAPTER 7Time-Based Trend Calculations

The purpose of all trend methods is to ignore the underlying noise in the market, those erratic moves that seem to be meaningless, and find the current direction of prices. But trends are dependent upon your time horizon. In addition, 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.

The technique that is used to uncover the 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 because it has a high cost of servicing debt? 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 series (based on price and time), the relationship between two markets, and the ranking of both similar and diverse markets. The regression slope was used to forecast the trend and bands around the regression line allowed us to decide if the trend had changed or if there was an opportunity for buying and selling inside the band. Chapter 5 looked at price direction based on events. ...