Trend Review
Courtesy of Allan
The chart below is of the Weekly SPX and is the single most important chart followed in my Trend Following Trading Models:
The model went SHORT the week of June 16, 2008 at 1318. It stayed SHORT until the week of March 30, 2009 at 843 where it went LONG. The SHORT January 25, 2010 at 1074, LONG March 8, 2010 at 1150 and it’s most recent signal is a SHORT, triggered the week of May 3, 2010 at 1111. As I write this, SPX is trading at 1042, for a gain of 69 points so far from its current SHORT signal.
As you can see, this model is not perfect, but it does catch enough of the dominant trends of the market so as to generate huge gains against relatively minor losses when it is wrong. This works for me because I don’t ever want to trade against the dominant trend of the market.
On a daily chart, which measures the shorter-term trend, the SPX Trend Model is also SHORT:
The Daily Model went SHORT on August 11 at 1090, for a current short-term gain of about 50 points. With both the Weekly and Daily SPX Trend Models in SHORT mode, the dominant trend of the market is clearly DOWN. A trend is a trend, until it reverses, then guess what, it’s still a trend, just in the opposite direction. That is the essence of trend following.
Trend Following is my new mantra. After reading Michael Covel’s, Trend Following, How Great Traders Make Millions In Up Or Down Markets, I devised a methodology that applies a simple, objective algorithm that applies basic trend following principles to stocks, ETF’s and stock indexes.
From Wikipedia, the free encyclopedia
In finance, trend following is an investment strategy that tries to take advantage of long-term moves that seem to play out in various markets. The system aims to work on the market trendmechanism and take benefit from both sides of the market enjoying the profits from the ups and downs of the stock or futures markets. Traders who subscribe to a trend following strategy do not aim to forecast or predict specific price levels; they simply jump on the trend and ride it.
In January, 2010, I started a private email list subscription service which I named Trend Following Trading Models. The methodology employs the same general trend following concepts that are described in Covel’s book. As the name implies, Trend Following Trading Models is designed to identify and track tradable trends. The service covers over 50 various stocks, indexes and ETF’s across a spectrum of time frames raging from intraday (60 & 240 minutes) to Daily and Weekly, depending on the stock, index or ETF. Each time frame is a separate trading system onto itself, although combining alternate time frames is a viable strategy. Included with the daily updating of the Trend Tables, the service presents brief commentaries with each update and publishes Trades of the Week in the Weekend Updates.
I am a staunch believer in Trend Following in trading and investing, i.e. identifying the dominant trend for any stock, index or ETF and hitching your trading wagon to the trend for its entirety. When the trend reverses, a new trend in the opposite direction occurs and new trades are initiated in the direction of that new trend. Accordingly, the real value of this service lays within the Trend Tables where the dominant trend for each symbol in the table is identified, along with the price level where the trend will be deemed to have reversed. Monitoring and acting in accord with these levels is the underlying paradigm of the service and of the trend following strategy.
Below (or attached) is a real time example of my Intraday Trend Table that follows SPX and QQQQ with frequent intraday updates:
Trend is defined by an objective, purely mechanical application of a simple algorithm to price histories. It is a calculation based on a proprietary Average-True-Range computation for selected time periods. It is much like a trailing stop methodology, where the reversal price is dynamic and effected by current price behavior, thus the reversals are constantly in flux. Each time frame has its own price reversal and the only moment that matters is the closing tic for the time frame in review. In other words, hourly price reversals can only occur at the exact top of each hour. Daily price reversals can only occur at the closing tic of each day’s trading and weekly price reversals occur only on the final tic of trading each week.
In the spirit of a picture is worth a thousand words, the Weekly and Daily SPX charts in this email illustrate Trend Following as used in following the stock market. This trading methodology is straight-forward yet potent in terms of concept, implementation and results. Once one grasps and develops confidence in the technique it will become an essential, almost mandatory tool for navigating through the markets.
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Allan’s “Trend Following Trading Model” is based on his trend-following trading system for buying and selling stocks and ETFs. Most trades last for weeks to months. Allan’s offering PSW readers a special 25% discount. Click here. For more details, read this introductory article.
