The Trend

[eastbay]

This is 2+2. We ought to be able to do a lot better than most trading forums where people, for some reason, spend all day discussing psychobabble mumbo-jumbo and subjective, pseudo-mystical claptrap.

Let's start with the recent remarks about "the trend" and "trend following."

What is "the trend" and how does one "follow" it? I'm not looking for hand-waving here, I'm looking for testable, quantitative, repeatable measures for finding "the trend" and testable, quantitative, repeatable methods for "following" it.

Any of you trend followers want to start?

eastbay

PS Yes, I've read all the standard books which manage to say almost nothing in hundreds of pages.

[blendedsuit]

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PS Yes, I've read all the standard books which manage to say almost nothing in hundreds of pages.

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kinda like your post. Do you have some sort of example? For instance, stocks tend to rise more in January than any other month.

[Sniper]

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What is "the trend" and how does one "follow" it? I'm not looking for hand-waving here, I'm looking for testable, quantitative, repeatable measures for finding "the trend" and testable, quantitative, repeatable methods for "following" it.

Any of you trend followers want to start?


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Some hands involved, but its mostly an "eye" thing! /images/graemlins/smile.gif

I'll start with the basics (excerpted from Charting by Michael "Tiny" Saul)...

The general direction of a stock's price movement over a period of time is called a trend.

If the price is moving up over time, then it is in an uptrend.
If the price is moving down, then it is in a downtrend.
And, if the price is essentially moving sideways, it is said to be in a range, or rangebound.

One of the main principles of price action is that a trend has a much greater likelihood of continuing than reversing.

Although, a directional up- or down-trending market will eventually lead to a rangebound market, and a rangebound market will eventually lead to a directional trending market, you can't always predict the precise timing of the change.

So, the goal is to recognize the current trend and use an applicable trading strategy.

If you are in an uptrend, look to buy the price pullbacks.
If you are in a downtrend, look to sell the rallies.
In a rangebound market, look to buy the low end of the range and sell the high end of the range.

While you can trade either, it's better to trade a directional trending market, since the moves tend to be larger.

Some statistics...
70% of the markets moves occur in only 20% of the time.
The market tends to stay rangebound 80-85% of the time.
The market tends to move directionally 15-20% of the time.

Make sure to use the right charts for the type of trading you are doing, as the short, intermediate, and long term trend outlook may be different. Chart suggestion...
Scalping: 1 minute
Daytrading: 5 minute
Swing Trading: Hourly
Intermediate: Daily
Investing: Weekly

You should also look at the chart one time period up from the chart you base your trading on.

[mrbaseball]

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What is "the trend" and how does one "follow" it?

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Sniper's response was great. This is how I use it and trade with it. I look at 3 charts (timeframes) of whatever I am trading. Usually 5 minute, 30 minute, and 60 minute.

I also use a moving average crossover. If the fast average is above the slow average on all 3 timeframes I consider it an uptrend and if fast is a below on all 3 a downtrend. I then make a trend following trade when the price rallies or dips to the slow average (on shortest chart usually 5 minutes). Obviously I use other things as well, such as trend lines and support/resistance for trade entries. But when I have met the condition of a trend on all 3 time frames and the price moves to the slow average on the short timeframe chart I am looking to enter the market in the direction of the trend.

[Sniper]

Trader Vic defines trends as follows...

An uptrend is a price movement consisting of a series of higher highs and higher lows.

A downtrend is a price movement consisting of a series of lower lows and lower highs.

[buffett]

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Investing: Weekly

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Whose terminology is this....Tiny's or Sniper's?

[Sniper]

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Investing: Weekly

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Whose terminology is this....Tiny's or Sniper's?

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Its Tiny's...

My own words, to elaborate, a Long Term Trend follower should use a weekly chart to identify the trend direction and a monthly chart for a bigger picture outlook.

[eastbay]

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What is "the trend" and how does one "follow" it? I'm not looking for hand-waving here, I'm looking for testable, quantitative, repeatable measures for finding "the trend" and testable, quantitative, repeatable methods for "following" it.

Any of you trend followers want to start?


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Some hands involved, but its mostly an "eye" thing! /images/graemlins/smile.gif


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Ok, now that we've gotten the hand-waving out of the way, let's get down to the real business of defining a trend.

What I am after is a quantitative, testable definition of a trend. The reason for this is that this is the only way to do a legitimate experiment to see if "following" (to be defined next) said trend is in fact profitable over the long term, in a verifiable way, not "so-and-so said he does it and can show you his audited statements" or "I do this every day and make a living at it" or other such assertions which are not independently verifiable.

The closest thing you provided to a workable definition is:

"If the price is moving up over time, then it is in an uptrend" and vice-versa.

But that's a pretty imprecise definition. How much time? How consistently up? Monotonically up, or just more up than down, or simply up overall?

So the first question is: how do we select "uptrend" data given a price stream in arbitrary time and price units?

Is 9,10,11 (say N-min bar closes) an uptrend? Why or why not?
Is 9,8,10,11 an uptrend? Why or why not?
How about 9,8,12,11,13?

What is the actual criteria that separates uptrend from non-uptrend?

eastbay

[eastbay]

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Trader Vic defines trends as follows...

An uptrend is a price movement consisting of a series of higher highs and higher lows.


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What is a "high"? A maximum over what time interval?

How many is a "series"? Can there be movement in that series which is not up, or does it have to be all up? The latter would seem to be an absurdity, as at some timescale there will always be fluctuation, and you would never have this "uptrend" condition.

So once we figure out what a "high" is (by defining an interval over which to take a maximum), how many lower highs can there be in this "series" before it is not an uptrend?

eastbay

[mrbaseball]

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What is the actual criteria that separates uptrend from non-uptrend?


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It depends? What is your timeframe? As Sniper showed there are several different timeframes you can consider and each timeframe can have a different trend going. I tend to trade short term by daytrading and scalping so I look at shorter timeframes. I couldn't care less what the monthly or weekly is doing and I'm typically only minorly interested in what the daily is doing with much more concern about interday trends.

If you want to test things (which it seems) I find moving averages as the best trend identifiers. Use a crossover or a longer term MA (ie 200 bars). If you are above it,it's an uptrend and below it a downtrend. Then do whatever testing you feel needs to be done.

But this type of trading is more of an artform than a science. There is no magic formula.

[LearnedfromTV]

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But this type of trading is more of an artform than a science. There is no magic formula.

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Just magic beans.

[Evan]

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But this type of trading is more of an artform than a science.

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This sounds a lot like "I don't really know what I'm doing and there's a good chance I'm running hot" to me.

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There is no magic formula.

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There's no magic formula for playing limi hold'em either, but it's certainly more science than art. Basically, this sentence is useless and irrelevant unless you actually think someone here needed you to confirm that you were no actually trading based on magic.

[mrbaseball]

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There's no magic formula for playing limi hold'em either, but it's certainly more science than art

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What about no limit? Certain areas of trading are certainly scientific and math based. Chart reading and technical analysis are not. They are all feel and experience and trying to create some sort of black box is an excersize in futility.

I've stood in trading pits or have been staring into a trading screen for close to 20 years and if there was a mathematical solution the business I am in wouldn't exist.

[eastbay]

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What is the actual criteria that separates uptrend from non-uptrend?


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It depends? What is your timeframe?


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My timeframe? I'm asking you guys what a trend is. I'm trying to make as few suppositions as possible so as not to prejudice the discussion.

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If you want to test things (which it seems) I find moving averages as the best trend identifiers. Use a crossover or a longer term MA (ie 200 bars). If you are above it,it's an uptrend and below it a downtrend.


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Ok, there's an operational definition of a trend: if the current price is above a 200 bar average it's an uptrend.

Ok, that's actually a fairly "good" definition in the sense that I'm looking for.

Now onto part two of the question: How does one "follow" a trend once it can be identified?

eastbay

[eastbay]

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But this type of trading is more of an artform than a science.

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This sounds a lot like "I don't really know what I'm doing and there's a good chance I'm running hot" to me.

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There is no magic formula.

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There's no magic formula for playing limi hold'em either, but it's certainly more science than art. Basically, this sentence is useless and irrelevant unless you actually think someone here needed you to confirm that you were no actually trading based on magic.

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No, there is no "magic" formula to limit hold 'em but there is most certainly a way to quantify an unbeatable strategy. It just happens to be extremely complex, however, in principle it can be computed, and in practice very good approximations to it can be computed.

However, that's neither here nor there. We're talking about trading now, and of course there is no "magic." I am simply asking what people are talking about when they speak of "trends" and "following the trend" to see if there is any merit in the idea.

eastbay

[eastbay]

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There's no magic formula for playing limi hold'em either, but it's certainly more science than art

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What about no limit? Certain areas of trading are certainly scientific and math based. Chart reading and technical analysis are not. They are all feel and experience and trying to create some sort of black box is an excersize in futility.

I've stood in trading pits or have been staring into a trading screen for close to 20 years and if there was a mathematical solution the business I am in wouldn't exist.

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I have news for you:

What you describe as "feel" is not messages from Jesus, or use of The Force, or the result of rain dances or voodoo dolls or virgin sacrifices to the trading gods. They are the result of processing information that you have available to you. YOU are a "black box."

All we're talking about here is what information you're using, and how you're using it, when you "follow a trend." If you can't describe it, I submit that you don't actually know what you're doing, and aren't saying anything meaningful when you advocate "following a trend." Either it means something or it doesn't. If it doesn't, let's please shut up about it. If it does, let's get on with the business of describing it.

eastbay

[eastbay]

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I've stood in trading pits or have been staring into a trading screen for close to 20 years and if there was a mathematical solution the business I am in wouldn't exist.

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Define "solution." Do you think there are precisely zero profitable trading ventures using automated algorithms?

eastbay

[blendedsuit]

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I've stood in trading pits or have been staring into a trading screen for close to 20 years and if there was a mathematical solution the business I am in wouldn't exist.

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HEY BASEBALL, LOOK UP JOHN HENRY, OWNER OF THE RED SOX, HE HAS USED MATH TO AMASS HIS FORTUNE IN OPTIONS CONTRACTS

[mrbaseball]

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If you can't describe it, I submit that you don't actually know what you're doing,

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I did describe (how I use it) in my first reply in this thread. Maybe you should reread that?

[eastbay]

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If you can't describe it, I submit that you don't actually know what you're doing,

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I did describe (how I use it) in my first reply in this thread. Maybe you should reread that?

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I read it. "Other things" is not testable. Do you believe your trend following is valid without these "other things"?

eastbay

[mrbaseball]

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HE HAS USED MATH TO AMASS HIS FORTUNE IN OPTIONS CONTRACTS


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I use lots of math in my options trading too. But I bet Henry didn't and doesn't use math when looking at a chart. This is my point if you would bother to read what I wrote.

This thread is refreshing and a good reminder of why I almost never post in these troll infested waters.

I'm done here.

[mrbaseball]

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Do you believe your trend following is valid without these "other things"?


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For me? No! I use trends in conjunction with support/resistance and oscillators and other indicators to get a feel for the total picture.

[Sniper]

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This thread is refreshing and a good reminder of why I almost never post in these troll infested waters.

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I don't think Eastbay's comments are Troll related... I presume he is interested in learning, however, I think he's just stuck in programmer mode! /images/graemlins/smile.gif

I will try to satisfy his programatic needs, as this thread progresses.

[blendedsuit]

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HE HAS USED MATH TO AMASS HIS FORTUNE IN OPTIONS CONTRACTS


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I use lots of math in my options trading too. But I bet Henry didn't and doesn't use math when looking at a chart. This is my point if you would bother to read what I wrote.

This thread is refreshing and a good reminder of why I almost never post in these troll infested waters.

I'm done here.

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hey, i'm angry. sorry i shouted at you. you are right. dont give up so easy. peace

[Officer Farva]

Here is the best piece of knowledge I have about markets and trends:

use as much relative information as possible, and value them all roughly equally.

for me, this means using a large set of quant factors (rsi, macd, ad, ma cross, 2nd derivatives, mean reversion, unit root tests, etc)

I then take some sort of fundamental idea and dump it in to this framework, and do it the same way everytime.

The key here is that although noone uses all of these factors everytime, there is always someone using each of these factors. So if you can get them to roughly be aligned, chances are there are more people in alignment with you. Combine that with a decent idea producer, and you have yourself a market beating trend model. I learned that first hand from one of the top macro managers in the world.