Thursday, December 24, 2009

The Friendly Trend

Before putting -30- on the week, here is a pensée on trends, just a small stocking stuffer for Christmas.

Sit with rapt attention in front of a trading trainer, and some time in the first hour or so you will hear, ""The trend is your friend." If you've sat in as many training session as I have, you will then roll your eyes.

Yet, the friendly trend underlies much, if not most, technical analysis of the markets. It has a verable pedigree, for it is based on Isaac Newton's statement in 1687 of his First Law of Motion: Something moving keeps moving unless something else intervenes.

A trend is a series of prices moving more or less in the same direction over a period of time. A trend lasts until it stops, either moderating into a sideways moving or reversing into the opposite trend.

Every trader's dream is to latch on to a trend early on, and then ride to its extreme, before jumping off just before the trend ends. That tactic is known as trend following, and trader's consider it to be one of the most reliable ways to trade.

Of course, as the markets lurch up and down from day to day, there's the problem of determining just what the trend is.

Each day's trading, like each minute's, has a high and a low. A up trend is formed when today's high is higher than yesterday's, and today's low is also higher than yesterday's: Higher highs and lower lows. A down trend is similary: Low lows and lower highs. So a trend can be constructed based on only two period's of trading (whether two days or two minutes).

A moving average is just a way of smoothing out the fluctuations within a trend to get a better view of the direction. Other indicators are just more complicated ways of attaining the same goal.

A technical trader has no idea why a trend began, nor why it ended. The trend simply is what it is, and good business means trading the trend according to its isness.

No comments:

Post a Comment