Trend analysis

Copyright 2013 John Sheely All Rights Reserved

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Creating a Trend Following Strategy through Research and Innovation

By John Sheely

There is a very high degree of risk involved in any type of trading. Trading or Investing in stocks, commodities, FOREX, or options is not suitable for all investors. Past results are not indicative of future returns.

Individual performance often depends upon an individuals unique skills, time commitment, and effort.

All comments made herein are for educational purposes only and should not be construed as investment advice regarding the purchase or sale of securities, options, futures, forex, or any other financial instrument of any kind. Consult with your investment advisor before making an investment decision regarding any asset class mentioned herein.

Risk Disclosure

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HYPOTHETICAL RESULTS DISCLAIMER

Hypothetical Performance results has many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits are losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program.

One of the limitations of hypothetical performance is that they are generated with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses are material points which can adversely affect actual trading results. There are numerous other factors related to markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.

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Dow Jones Industrial Daily Chart

From this blank canvas, new traders and investors are asked to decipher this raw data to formulate a trade plan to profit from the trends that appear within this time period. There are technical methods that can assist the trader in this analysis.

Created with TradeStation© TradeStation Technologies, Inc. All rights reserved


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Most traders are familiar with moving averages. Moving averages can be helpful in trend analysis, but they can also lead to many false signals. By themselves, they generate returns only when there is a long-lasting and persistent trend.



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Many traders and investors watch price levels of support or resistance. While this is very popular, price movement through these price levels often lead to false breakouts.



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The frequency in which trend signals result in false signals or trends of a short duration is higher than many traders expect. Research in trend analysis supports the fact that most trends are brief and travel short distances. Only a few trends travel great distances when measured in average true range.



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The Exceptional Trend

Some trends do travel great distances and can lead to great returns for the investor and trader. However, these gains must be balanced with the losses that occur with false signals.



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The Disaster

While one stock or commodity is generating excellent returns, another is generating persistent losses.



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One Strategy for Every Market

The analysis of price should be based upon principles which are consistent with all asset classes. Algorithms today can combine back-tested strategies over thousands of data points with sound money management strategies. The end result is an expectancy of profitability over time.



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From New Research Comes New Indicators

After thousands of hours of research in trend analysis, new indicators can be created that combine some of the best elements of older technical indicators. These are not modifications of old indicators, but new indicators based upon an original design.



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A Single Strategy of Analysis for all Markets

By using a single strategy to define the trend, we can be more confident we are devising a sound trade plan to engage the markets. There will still be many false and losing trend signals. Research reveals this cannot be avoided. However, over time positive returns can be expected, if the future prices behave like prices behaved in the past.



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Taking Advantage of the Research

From the original blank canvas, we can create a trend strategy that is combined with a money management strategy. Knowing that trends can end at any time, we can take profits at certain price levels based upon average true range from our trend entry price. We hold through the market corrections within the trend, as long as our indicators stay bullish in a rising market or stay bearish in a falling market.



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Putting the Daily Trend Signals in the Context of the Trend of the Weekly Trend

Algorithms can now join the information of the daily trend with the trend analysis of the longer-term weekly chart. We can then modify our money management, in both profit targets and stop loss levels, depending upon the longer term trend of each market.



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Most Trends Do Not Move Great Distances

These profit objectives are based upon ATR. This is far more effective than profit targets based upon a percent of price. Why? Each separate commodity and especially separate stocks do not have a similar volatility when measured in percent. Two stocks, both with the same price of $50, may have entirely different daily ranges when measured in percent. One stock may move 2% of price on a daily basis and the other $50 stock may move 5% of its price on a daily basis. This requires a different strategy for both stop losses and profit targets for each of the stocks.



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Commodities are not More Volatile than Stocks

Many traders and investors believe that commodities are more volatile than stocks. This is simply not the case, when each is measured in movements based upon a percent of price. It is the extreme use of available margin by the new trader that creates the volatility in the commodity account. Now that commodities are traded around the clock, gaps, such as seen above, are now rare events. They are not rare in stocks.



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A Tale of Two Stories – Yen and Australian Dollar

Some trends do move long distances, but most do not. If the weekly trend is flat, trend signals within the daily chart should be reduced in size or an entirely different strategy is to be employed.



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Stock Indexes

Of course, you are only seeing a base systematic approach. Much greater detail is added to the final script. However, you can get a sense that you can combine research to analyze prices for greater potential.



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Commodities

While many Gold Bugs were wondering if the price decline was real in gold, an analysis of price was indicating a bearish trend and rejecting any potential buy signal.



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A Different Point of View

• One question that all traders and investors ask is whether any market reversal from a previous trend is merely a correction of that trend or whether the reversal is the start of a new trend in the opposite direction.

• There is an answer to that question that is backed by thousands of hours of research.

• In the coming months, I plan to answer that question by introducing an entirely different way to analyze prices.

• Look for my detailed book on the subject to be published later this year.

Date post:	04-Dec-2014
Category:	Economy & Finance
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Trend analysis

Economy & Finance