Make the trend your friend by Darren Winters
History shows that the markets are usually in trends. By classifying the current trends and then applying other technical, sentimental and fundamental variables, you can build a picture for where the future trends may be.
We are all taught when we start investing that we should not try to catch the proverbial falling knife. That is to say, if a stock is heading down, don’t try to catch the turn. The opposite is true in a rising market, many short sellers have been caught out trying to catch a down turn in the fortunes of Ebay’s stick!
We can understand why traders try to catch bottoms and tops in stick prices, but we should also be aware that when a stock or market is trending, that trend can often last longer then you might think. I know of traders who had been trying to short Ebay for 2 years it was only recently that they dropped from $100 to $71 by which time they have given up missing the move!
The old cliché “ the trend is your friend” is widely accepted by most technical analysts as being very important because generally, once a stock is moving in a direction, it will have momentum behind it. Understanding the long, medium and short term trends is possibly some of the most useful knowledge and investor can have. Also, this can apply to a short term trader as well as a longer term investor as we shall see.
TRENDING TIME FRAMES
Let us first make it clear that looking at trends helps us see the past, not the future. For instance, just because we have seen xyz stock in an uptrend for 6 months, doesn’t mean that it will continue. Assessing the current trend only helps us to make a start at building the larger picture for the future. Having said that, once you know where we have come from, it makes the process of predicting where we are going that much easier.
How often have we been told to cut our losses and let our winners run? If you have invested into a stock and it is performing well, why sell it? Once a trend has been established, it is pointless closing your position until you are stopped out.
Short term traders hare only going to be interested in the near term trend. However, longer term position traders and investors may be more interested in the medium and longer term timeframes. I also like to be aware of what I would call the super long timeframe.
Under the Dow theory, a short term is based on days going into weeks; a medium term is over a period of weeks to months; long term is months to years and super long term is two or more years.
For example, if we analyse the current trends for the S&P 500, we could use this information to help us make trading decisions. (Note that using trend classifications alone is a dangerous practice and should be used in conjunction with other analysis).
So looking at the chart of the S&P at the time of writing this, the short term trend is most certainly up with the rally that started with a double bottom on the 13th August. Then looking at the medium term trend, it can still be argued that it is down since the highs made earlier in the year. Possibly a break above the declining trend line would reclassify that trend. Then if you look at the long term trend, it is still most certainly up ( based on taking the two low points of Oct 2002 and March 2003). This is because of the rally of 2003. So far this year, the medium term down move could be argued as merely a pullback in the dominant larger trend.
However, I like to also look out a bit further to see the super long timeframe. Zooming out on the chart, you could still argue that we are in a long term downtrend because of the series of declining tops etc.
Now just because the super long term frame is currently down, doesn’t mean that the market has to carry on moving that way. Similarly, the long term trend which is currently still up doesn’t have to remain that way either.
CLASSIFICATIONS
In order for the long term trend for the S&P to change, it would have to decline past where normal pullbacks can occur. For this, you should look at where this trend started back in October of 2002 and its recent peak in April of this year. You should them look at Fibonacci retracement figures for what could constitute a normal pullback. This could come down as far as the 61.8% and yet still remain in the uptrend. However, should the S&P start to fall below this retracement level, we would then re-classify the long term trend. This way, with all time frames, we can start to build a picture of where the dominant trends are in which to start to work out the future direction of the markets.
CONCLUSIONS
Trend followers can make a comfortable long term success of their investing by ensuring they stay on the right side of the trend. It is just up to you to pick your time frame. If you are only interested in the long term trend, you may not be interested in the short term gyrations of the markets. It would only be when the long term trend looked like it was going to change that you would want to jump ship and close positions.
So are we in the midst of a trend change on the long term time frame from up to down? Or has this year been a pullback in a continuing bull market? Obviously no-one knows the answer to these, but by studying stock market history, fundamentals, and market sentiment, it can certainly help you prepare for which direction the long term trend is going to be. And if we know what it is, do we really care what direction it will be?
For further reading on trend analysis, we recommend 'The technical analysis course' by Thomas Meyers
Darren Winters
We are all taught when we start investing that we should not try to catch the proverbial falling knife. That is to say, if a stock is heading down, don’t try to catch the turn. The opposite is true in a rising market, many short sellers have been caught out trying to catch a down turn in the fortunes of Ebay’s stick!
We can understand why traders try to catch bottoms and tops in stick prices, but we should also be aware that when a stock or market is trending, that trend can often last longer then you might think. I know of traders who had been trying to short Ebay for 2 years it was only recently that they dropped from $100 to $71 by which time they have given up missing the move!
The old cliché “ the trend is your friend” is widely accepted by most technical analysts as being very important because generally, once a stock is moving in a direction, it will have momentum behind it. Understanding the long, medium and short term trends is possibly some of the most useful knowledge and investor can have. Also, this can apply to a short term trader as well as a longer term investor as we shall see.
TRENDING TIME FRAMES
Let us first make it clear that looking at trends helps us see the past, not the future. For instance, just because we have seen xyz stock in an uptrend for 6 months, doesn’t mean that it will continue. Assessing the current trend only helps us to make a start at building the larger picture for the future. Having said that, once you know where we have come from, it makes the process of predicting where we are going that much easier.
How often have we been told to cut our losses and let our winners run? If you have invested into a stock and it is performing well, why sell it? Once a trend has been established, it is pointless closing your position until you are stopped out.
Short term traders hare only going to be interested in the near term trend. However, longer term position traders and investors may be more interested in the medium and longer term timeframes. I also like to be aware of what I would call the super long timeframe.
Under the Dow theory, a short term is based on days going into weeks; a medium term is over a period of weeks to months; long term is months to years and super long term is two or more years.
For example, if we analyse the current trends for the S&P 500, we could use this information to help us make trading decisions. (Note that using trend classifications alone is a dangerous practice and should be used in conjunction with other analysis).
So looking at the chart of the S&P at the time of writing this, the short term trend is most certainly up with the rally that started with a double bottom on the 13th August. Then looking at the medium term trend, it can still be argued that it is down since the highs made earlier in the year. Possibly a break above the declining trend line would reclassify that trend. Then if you look at the long term trend, it is still most certainly up ( based on taking the two low points of Oct 2002 and March 2003). This is because of the rally of 2003. So far this year, the medium term down move could be argued as merely a pullback in the dominant larger trend.
However, I like to also look out a bit further to see the super long timeframe. Zooming out on the chart, you could still argue that we are in a long term downtrend because of the series of declining tops etc.
Now just because the super long term frame is currently down, doesn’t mean that the market has to carry on moving that way. Similarly, the long term trend which is currently still up doesn’t have to remain that way either.
CLASSIFICATIONS
In order for the long term trend for the S&P to change, it would have to decline past where normal pullbacks can occur. For this, you should look at where this trend started back in October of 2002 and its recent peak in April of this year. You should them look at Fibonacci retracement figures for what could constitute a normal pullback. This could come down as far as the 61.8% and yet still remain in the uptrend. However, should the S&P start to fall below this retracement level, we would then re-classify the long term trend. This way, with all time frames, we can start to build a picture of where the dominant trends are in which to start to work out the future direction of the markets.
CONCLUSIONS
Trend followers can make a comfortable long term success of their investing by ensuring they stay on the right side of the trend. It is just up to you to pick your time frame. If you are only interested in the long term trend, you may not be interested in the short term gyrations of the markets. It would only be when the long term trend looked like it was going to change that you would want to jump ship and close positions.
So are we in the midst of a trend change on the long term time frame from up to down? Or has this year been a pullback in a continuing bull market? Obviously no-one knows the answer to these, but by studying stock market history, fundamentals, and market sentiment, it can certainly help you prepare for which direction the long term trend is going to be. And if we know what it is, do we really care what direction it will be?
For further reading on trend analysis, we recommend 'The technical analysis course' by Thomas Meyers
Darren Winters
posted by Darren Winters at 12:32 PM
0 Comments:
Post a Comment
<< Home