Trend Following Tutorial
by Chart School - May 17th, 2010 12:20 pm
Trend Following Tutorial
Courtesy of Allan
The SHORT on this SPX Weekly chart was generated at the end of the week of Jun 16, 2008 @ 1317. It was in force until the end of March, 2009 @ 843. That trade gained 474 SPX points, or about 36%. It could have been implemented using an unleveraged index, SPY, for about a 36% gain. It could also have been implemented using a leveraged ETF for approximately double, or triple that return. The key focus for this tutorial is that the methodology was SHORT during a severe and prolonged market decline.
The next signal was a LONG signal, as shown on the chart below:
This LONG signal was generated at the end of March, 2009 @ 843. It was EXITED at the end of January, 2010 @ 1074. The gain on this LONG was 231 SPX points, or about 27%.
These two signal totaled over 700 SPX points over the course of about two years. Such are the market times we are in and unless and until these volatile swings come to an end, this is a simple, mechanical, tradable way to participate successfully in these trends.
The trend line you see on the above charts is based on what is called an Average True Range algorithm. It was written up in the June, 2009 issue of Technical Analysis of Stocks & Commodities. The algorithm I use for these trends is slightly different then the algorithm written up in the article, not that mine is better, but I think it is more tradable.
Daily Charts
The same algorithm works on Daily charts. Below are some examples using the same trend model on the SPX Daily chart:
Notice how the Daily Trend Model works in the exact same way as the Weekly Trend Model. In this case, a LONG signal in early November lasted through late January and gained about 30 SPX points. Below, the ensuing SHORT signal in late January:
Following the late November, 2009 BUY, the daily trend reversed SHORT in late January, 2009. Below, the late February LONG signal:
By now this looks the proverbial greatest thing since sliced bread.
Not so fast……looks what happens next:
The SHORT_EXIT(LONG)_SHORT series of signals in late April is