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Trend Trading Set-Ups: Entering and Exiting Trends for Maximum Profit by Alan Farley, L.A. Little

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CHAPTER 5

The Data behind Trend Trade Set-Ups

There are few absolutes in trading but of the few that exist, one unavoidable fact is that everything in trading is based on tests. There are tests of swing points, anchor bars, and anchor zones. For those who dabble in classical technical analysis, there are tests on most all patterns there as well, such as flags, triangles, moving averages, and so forth. All technical analysis is premised on the idea of a test and, in fact, is continually defined by the unending series of tests that is always present and repeating in the market.

For neoclassical technical analysis, with the emphasis being on keeping it simple yet holistic, tests of swing points that succeed result in trend transitions and reaffirmations as identified through swing point breaks. Those tests that fail lead to retraces. Similarly, tests of anchor bars lead to retraces (failure) and breakouts (success). The same is true of anchor zones which many times serve to define trading floors and ranges and are themselves the object of tests.

Test . . . test . . . test is what the market does on a continual basis. Testing is the market's way of discovering the correct price for securities, and it is a constant process since price discovery is never final. Price and value are continually shifting, and it is through testing that the market discovers it. The process is referred to as efficient, though the use of such a term is somewhat debatable. Without question though, it is workable ...

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