Defining a trend

Here we go. The postings for the coming weeks are all related to the subjects/tools that I am studying and implementing into my trading plan.

The first thing I need to know before I start a trading day is to evaluate if I am potentially facing a trending day or another choppy one. There are different strategies for different type of market conditions. It is the most frustrating when getting chopped out by the market. I had tons of this kinda experience in dummy trading. The main reason? I was bowling in a tennis court, I hurt my arm and damage the court.
Two tools caught my attention. Average Directional Index and Guppy Multiple Moving averages.

I am looking at longer time frame for this purpose. For example, if I were to trade off 15-min chart, I will be looking at 10 times of 15-min which is approximately a 120-min chart to evaluate the trend. The idea is to see a bigger picture. I would layout 120-min chart with 200 SMA and ADX (Average direction index). I am not interested in the ups and downs of 200 SMA. Instead, I am focusing on the slope of it. I am ONLY looking for Long if it is sloping up, and Short if it is sloping down.

That’s not all. I start looking at ADX. One major function of ADX is to determine if a futures/stock should be traded with trend-following or non-trend-following system. Right tools in the right time, give you the ‘right’ result. ADX was introduced by Welles Wilder in his book New Concepts in Technical Trading Systems. Some explanations can be found on stockcharts.com as well.

ADX does not generate buy/sell signal for me. Instead, it is showing me the strength of a trend. This is the key point. When ADX is below 20, it shows a lack of clear trend. So, trend-following systems will face some whipsaws here and there. On the other hand, when ADX is rising and crosses above 20, it shows a trend is building up and gaining strength. So, be happy, dummy traders. Some said when ADX falls from 40, it is showing a trend is pausing and steps into consolidation phase.

In addition the ADX, I browsed through my library last night. ‘Trend Trading’ by Dalry Guppy again caught my eyes. Mr.Guppy introduced Guppy Multiple Moving averages(GMMA). TraderMike wrote about GMMA before. It is used to view the nature and characters of a trend. It not so much of helping to make any decision, it does give me a feel and insight of the trend.

I have done some simple programming to display GMMA in Tradestation.
Some people are sharp enough to look at the chart and shout “It is trending”. I am not. I need some forms of analysis and tools to help. But, anyway, the point here is to make sure I am trading the right strategy in the right market condition.

Coming soon.. I am looking at Candy sticks…Oops…I mean Candlesticks…

Here are some ideas and readings I have found on the internet.

About Gav

A Father, Husband, Trader, and Blogger. A serious coffee addict. Started trading since 2005, trades Futures and FX.

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Comments

  1. Gav,

    To add some reading for your trending day. Linda Raschke said in one of her article:

    The following conditions are fairly reliable indicators for the start of one of these trends (I personally skip the first buy or sell swing when one occurs because the move ensuing could be quite strong):

    * Narrowest range in the last 7 days
    * 3 consecutive days with small range
    * The point of a wedge
    * A breakaway gap
    * A rising ADX (14-period) above 32

    zbs

  2. Gav,

    To add some reading for your trending day. Linda Raschke said in one of her article:

    The following conditions are fairly reliable indicators for the start of one of these trends (I personally skip the first buy or sell swing when one occurs because the move ensuing could be quite strong):

    * Narrowest range in the last 7 days
    * 3 consecutive days with small range
    * The point of a wedge
    * A breakaway gap
    * A rising ADX (14-period) above 32

    zbs

  3. Zbs,
    Thanks! I did read Linda’s article sometime before. Just can’t find the link.

    Hope you have a great december.

    Gav

  4. Zbs,
    Thanks! I did read Linda’s article sometime before. Just can’t find the link.

    Hope you have a great december.

    Gav

  5. If you are loking at simpler, better, and more objective way of finding trend read the Ed Seykota’s explanation of trend and how to calculate it. You may find it better than the approach you are currently using.
    “A trend is a general drift or tendency in a set of data. All measurements of trend involve taking a current reading and a historical reading and comparing them. If the current reading is higher than the historical reading, we have an up-trend. If lower, we have a down-trend. In the improbable event of an exact match, we have a sideways trend.
    The direction of the trend depends upon the method we use to perform the comparison. Real instruments fluctuate minute-to-minute, day-to-day and year-to-year. We have, therefore an enormous supply of historical points to use to determine trend. As such, we can determine as many instances of trend as we please, in any direction that we please.”

    http://www.seykota.com/tribe/TSP/Trends/index.htm
    http://www.seykota.com/tribe/TSP/Trends/Exercise_1/index.htm
    http://www.seykota.com/tribe/TSP/Trends/Feedback/index.htm

  6. If you are loking at simpler, better, and more objective way of finding trend read the Ed Seykota’s explanation of trend and how to calculate it. You may find it better than the approach you are currently using.
    “A trend is a general drift or tendency in a set of data. All measurements of trend involve taking a current reading and a historical reading and comparing them. If the current reading is higher than the historical reading, we have an up-trend. If lower, we have a down-trend. In the improbable event of an exact match, we have a sideways trend.
    The direction of the trend depends upon the method we use to perform the comparison. Real instruments fluctuate minute-to-minute, day-to-day and year-to-year. We have, therefore an enormous supply of historical points to use to determine trend. As such, we can determine as many instances of trend as we please, in any direction that we please.”

    http://www.seykota.com/tribe/TSP/Trends/index.htm
    http://www.seykota.com/tribe/TSP/Trends/Exercise_1/index.htm
    http://www.seykota.com/tribe/TSP/Trends/Feedback/index.htm

  7. Also look at the discussion on Curtis Faith’s (the original and most sucessful Turtle)site on “Trend following systems on stocks”
    http://www.tradingblox.com/forum/viewtopic.php?t=62&highlight=270
    Especially read Curtis’s coments in that discussion. The 270 days filter gives good trending stock universe.

  8. Also look at the discussion on Curtis Faith’s (the original and most sucessful Turtle)site on “Trend following systems on stocks”
    http://www.tradingblox.com/forum/viewtopic.php?t=62&highlight=270
    Especially read Curtis’s coments in that discussion. The 270 days filter gives good trending stock universe.

  9. Thanks Pradeep for the good sources of information.
    I will check out the links!

    Have a great day.
    Gav

  10. Thanks Pradeep for the good sources of information.
    I will check out the links!

    Have a great day.
    Gav

  11. I love the concepts here and hope to apply them in my site: Linear Cash – lnca.com

    Thanks, Mike

  12. I love the concepts here and hope to apply them in my site: Linear Cash – lnca.com

    Thanks, Mike

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