
N
TRADESTATION (OMEGA RESEARCH)
SIMPLE ENOUGH
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Stocks & Commodities V16:9 (425-427): Trading the Trend by Andrew Abraham
Bank, the upwave has higher highsand the prior downwave was not surpassed, so the market is in an uptrend;look to buy only the upwaves. InFigure 2, in the corn market, the opposite situation exists and the sameconcept is applied, except in this case,the concept is in reverse because it isa downtrend. During November, thevolatility indicator reversed trend, andthe prior low was broken. This wasour signal to go short. Our exit signalwill be the volatility indicator turningpositive.The position was closed in January1998, and since the rally’s high beginning in January did not surpass thehighs of October, our second definitionof an uptrend was not met. As a result,we went short again when the volatilityindicator went negative. In March, theposition was closed with a small loss,and again, the highs of this upwave didnot surpass the highs of January, so wehad a signal to go short again when thevolatility indicator went negative andthe lows of February were broken.
JOSÉ CRUZ
THE TENETS OFGOOD TRADINGNow we are developing the tenets ofgood trading. We are trading with thetrend and locking in profits. But inthat case, how do we know the trendmight be ending?As stated, an uptrend is intact untilthe previous downwave in the uptrendis surpassed. A downtrend is intact untilthe previous upwave is surpassed. Wewill use the lowest low while the volatility indicator signals an uptrend forour low point. This is just an alert thatpossibly the trend might change. Wewould still take the next trade in thedirection of trend (in a confirmeduptrend, we take all upwaves, and in adowntrend, all downwaves).Our next step is to confirm whetherthe trend has ended. This is confirmedon our next wave. If we are in anuptrend, and if our last downwavewent below the prior downwave, weare on alert. If the next upwave surpasses the prior upwave, our trend isintact and our alert turned off.In Figure 3, which shows a chart of
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Stocks & Commodities V16:9 (425-427): Trading the Trend by Andrew Abraham
FIGURE 3: SWISS FRANC. The downtrend from September to March was a smoothdecline.
FIGURE 4: S&P 500 FIVE-MINUTE BARS. Midway through the trading day, thetrend was down.
the Swiss franc, we went short in April 1997 and closed theposition in June 1997 with a nice profit. Because the highs ofthe prior upwave were not surpassed, we know we are still ina downtrend and went short again in June 1997. This trade didnot work, however, and the next blue upwave surpassed theprior blue upwave; thus, we are on alert the trend might bechanging. We went short again in September 1997.
MULTIPLE TIME FRAMESTo enhance our performance in this strategy, we can use adual time frame. We look to a higher time frame to identifythe trend and only want to trade in that direction. In Figure 4,we can see we are in a downtrend as well as a downwave onthe five-minute chart of the Standard & Poor’s 500 index, sowe only look to take trades to the short side on the one-minutechart (Figure 5). We are short from approximately 11:30 inthe morning to the close. The trader looks to the lower timeframe to actually find the trades in the same direction of thehigher time frame.On the one-minute chart, we are looking to trade only fromthe short side because the five-minute bars are in a downtrendfrom a little after noon. In our diagram, we see we had threetrades. Two of them worked and in the one that didn’t,our loss was relatively small. If one-minute bars are tooshort of a time frame, then consider trading five-minutebars; the trader would look at the 15-minute chart todetermine the trend.For example, if on the 15-minute chart he is in an uptrendand identifies blue upwaves, he would go down to his fiveminute chart, identify a red downwave and prepare a buy-stopto pull him in the market if an upwave becomes present. Thesame applies just in reverse for going short.The time frames can be anything from a 10-tick or 25-tickto a daily and a weekly. There must be substantial differencesbetween the two frames. Some ideas would be 15-minuteversus 60-minute, daily versus weekly, weekly versus monthly.Neither we nor anyone else has developed a Holy Grail systemor an infallible trend indicator, but through diversification of
FIGURE 5: S&P 500 ONE-MINUTE BARS. There were two profitable short sellsignals, based on the trend of both the five-minute and one-minute bars.
noncorrelated markets and also a diversification of time frames,the probability of success can be obtained.
SUMMARYTrading should be a simple application of a trend indicator,such as the volatility indicator, and a trading plan with rules.To enhance your profitability, consider using two differenttime frames, one for the trend and a lower time frame to signalyour trades.Andrew Abraham is a trader and a Commodity TradingAdvisor with Angus Jackson.
FURTHER READINGKrausz, Robert [1996]. “Dynamic multiple time frames,”Technical Analysis of STOCKS & COMMODITIES, Volume14: November.Wilder, J. Welles [1978]. New Concepts in Technical Trading Systems, Trend Research.†See Traders’ Glossary for definition
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Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
Rating Trend Strengthby Tushar S. Chande
Here's a simple indicator of trend strength. It goes like this: A value of +10 signals an uptrend; a valueof -10 signals a downtrend. S TOCKS & COMMODITIES Contributing Editor Tushar Chande uses this simplerating system to help answer the eternal traders' question: Is the market trending?
A
s you may have noticed, a number of rather complicated indicators are available to measure trend
strength. None of these indicators, unfortunately, is perfect. You could use J. Welles Wilder's averagedirectional index (ADX) as an indicator of trend strength, or perhaps the r² value from linear regressionanalysis. Or you could even use the vertical horizontal filter (VHF) to help determine whether the marketis trending.Each of these indicators requires the user to determine how many days' data should be used in thecalculations. As you vary the indicator length or number of days used in the calculation, however, theresult of the calculation changes also. Thus, there is no unambiguous answer. If the market were about toenter or leave a trading range, you could get a different indication of trend strength every day — afrustrating set of circumstances.RATING THE TRENDHere is my way of rating a trend, a method I call trendscore. If today's close is greater than or equal to theclose x days ago, score one point. If today's close is less than the close x days ago, the trend's rating losesone point.Next, compare today's close to the close x+1 days ago. If today's close is greater than or equal to thatclose, score another point. Deduct one point if the close is lower than the prior close.
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Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
If (today's close >= close x days ago) then score = 1If (today's close < close x days ago) then score = -1Add up the score for 10 comparisons; the score varies from + 10 to -10. If today's close is greater than allthe previous closes, then the trend's score is +10; if today's close is less than all the previous closes, thescore is -10. You could smooth? the data by adding fewer than 10 days or more than 10 days.Trendscore = 10-day sum of scores from days 11 to 20I begin my calculations at 11 days back from the present and go back another 10 days. Thus, I comparetoday's close to the closes from 11 to 20 days ago. If today's close is greater than all 10 closes, then thetrend's score is +10. If today's close is less than the closes from 11 to 20 days ago, then the trend's score is-10. In sideways markets, the score ranges from +10 to -10. A positive score shows an upward trend bias.Similarly, a negative score shows a downward bias.I prefer the 11- to 20-day period because it fits my trading horizon. A shorter time of comparison may betoo volatile, producing frequent trend change signals, while a longer comparison time is slow to respond.During long trends, the trendscore remains at the outer limits, +10 or -10, for the duration of the trend. Insideways markets, the score doesn't remain at +10 or -10 for long, oscillating between these limits.
Note how the VHF indicates neither the sign nor the direction ofthe trend, while the trendscore indicates both the trend directionand trend strength.META STOCK FORMULASWe can use MetaStock to rate trends using the trendscore method . In MetaStock's formula builder, weuse the ref function to refer to past data:TrendScore =if(c,>=,ref(c,-11),1,-1)+if(c,>=,ref(c,12),1,-1)+if(c,>=,ref(c,-13),1,1)+if(c,>=,ref(c,-14),1,1)+if(c,>=,ref(c,-15),1,1)+if(c,>=,ref(c,-16),1,1)+if(c,>=,ref(c,-17),1,1)+if(c,>=,ref(c,-18),1,1)+if(c,>=,ref(c,-19),1,1)+if(c,>=,ref(c,-20),1,-1)Figure 1 shows the trendscore for General Electric (GE) common stock for 1987. Note how the scorevacillated during the sideways period from April to June. GE's trendscore remained close to or at +10from early June through mid-August, falling off close to the top. It rallied to +10 briefly in lateSeptember and early October. However, it quickly settled to -10 well before the October 1987 crash. Inmore recent price action, GE'S score moved quickly but smoothly to catch the major trends (Figure 2).The score was at +10 during each upward trend. The brief corrections were enough to send the score
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Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
FIGURE 1: TRENDSCORE, GE, 1987. Figure 1 shows the trendscore for General Electric (GE)common stock for 1987. Note how the score vacillated during the sideways period from April to June.GE's trendscore remained close to or at +10 from early June through mid-August, falling off close to thetop. It rallied to +10 briefly, in late September and early October. However, it quickly settled to -10 wellbefore the October 1987 crash.
FIGURE 2: TRENDSCORE, GE, 1992-93. In more recent price action, G E's score moved quickly butsmoothly to catch the major trends. The score was at +10 during each upward trend. The briefcorrections were enough to send the score down to -10 for short periods.
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Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
down to -10 for short periods.Intel (INTC) had a big upward move in 1992-93 before entering a broad sideways period (Figure 3). Thetrendscore was pinned to +10 during major portions of the upward move, and it was quick to changedirections during sideways periods. You can get a closer look at the trading range action in Figure 4. Thetrendscore came off its +10 reading in late January 1993 and rallied back up to +10 in February throughMarch. However, it settled down in the -10 area on March 22. The -10 reading of April 15 caught thebreak through 110 to the 90 area.We would expect a loss in momentum as Intel enters the sideways range. You can verify this in Figure 5,which displays the moving average convergence/divergence indicator (MACD). The MACD peaked in earlyJanuary and trended lower through April. Other long-range momentum indicators would confirm thisdrop in momentum.Figure 6 shows the 28-day vertical/horizontal filter. This trend indicator displays similar behavior in earlyJanuary, coming off its highs at almost the same time as the trendscore. V HF formed a double bottombetween February and early April and has trended higher since. The trendscore flattened out at -10somewhat before the VHF. Note how the VHF indicates neither the sign nor the direction of the trend,while the trendscore indicates both the trend direction and trend strength (+ 10 or -10).A MATTER OF STYLEYou could trade the trendscore many ways. You could use the zero crossing as an early signal. Youwould then buy when the trendscore becomes positive and sell when it becomes negative. Or you couldwait one to three days after the trendscore reaches +10 or -10 before buying (+ 10) or selling (-10) . Oryou could combine the trendscore with a moving average, trading an upward or downward cross over.Another variation would be to go long after the trendscore crosses from -10 to above +5 and go shortafter the trendscore falls from +10 to below 5. The approach you choose depends on your trading style.You could also smooth the trendscore with more or fewer days than I used in my calculations. You could,for example, use fewer than 10 days for short-term and 20 to 30 days for intermediate-term trading. Youcould also combine trendscore with other indicators of trend strength. For example, if you combined itwith the VHF indicator, trendscore would provide an indication of direction, while the V HF could provideadditional information about the trend's strength.You could also substitute intraday data in the trendscore method for short-term trading, using hourly datato calculate a trend's score instead of daily data.Trendscore is a simple way to rate trend strength. It indicates both the direction and strength of the trendand can be easily combined with various trend-following strategies.Tushar Chande, C TA , holds a doctorate in engineering from the University of Illinois and a master'sdegree in business administration from the University of Pittsburgh. He is a principal of Kroll, Chande,& Co.
ADDITIONAL READINGAppel, Gerald [1985]. The Moving Average Convergence-Divergence Trading Method , Advanced
References
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Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
FIGURE 3: TRENDSCORE, INTC, 1992-93. Intel had a big upward move in 1992-93 before entering abroad sideways period. The trendscore was pinned to +10 during major portions of the upward move,and it was quick to change directions during sideways periods.
Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
FIGURE 4: TRENDSCORE, INTC, EARLY 1993. You can get a closer look at the trading range action.The trendscore came off its +10 reading in late January 1993 and rallied back up to + 10 in Februarythrough March. However, it settled down in the -10 area on March 22. The -10 reading of April 15caught the break through 110 to the 90 area.
Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
FIGURE 5: INTC, WITH MACD, EARLY 1993. We would expect a loss in momentum as Intel entersthe sideways range. You can verify this here, where the moving average convergence/divergenceindicator(Macd) is displayed. The MACD peaked in early January and trended lower through April. Otherlong-range momentum indicators would confirm this drop in momentum.
Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
FIGURE 6: VHF WITH 28-DAY FILTER, EARLY 1993. Figure 6 shows the 28-day vertical/horizontalfilter. This trend indicator displays similar behavior in early January coming off its highs at almost thesame time as the trendscore. VHF formed a double bottom between February and early April and hastrended higher since. The trendscore flattened out at -10 somewhat before the VHF. Note how the VHFindicates neither the sign nor the direction of the trend, while the trendscore indicates both the trenddirection and trend strength (+10 or -10).
Stocks & Commodities V. 11:9 (382-386): Rating Trend Strength by Tushar S. Chande
Version, Scientific Investment Systems.Colby, R.W., and T.A. Meyers [1988]. The Encyclopedia of Technical Market Indicators , DowJones-Irwin.Pring, Martin J. [ 1985]. Technical Analysis Explained , McGraw-Hill Book Co.Wilder, J. Welles [1978]. New Concepts in Technical Trading Systems , Trend Research.
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Stocks & Commodities V. 10:7 (313-315): Stocks According To Trend Tendency by Stuart Meibuhr
Stocks According To Trend Tendencyby Stuart Meibuhr
Many times, a question asked of STOCKS & COMMODITIES readers will more than likely find an answer —and more than an answer, further questions. Such was the article that E. Michael Poulos presented earlyin 1991, when he showed how assumed trend tendencies ain't necessarily so. Here, Stuart Meibuhranswers one of those corollary questions. If certain futures contracts show decided trend tendencies, canthe same be said about certain stocks or indices?
T
he question that E. Michael Poulos asked in the January 1992 STOCKS & COMMODITIES was "Which
futures trend the most?" In turn, that question triggered a corollary question, "Which stocks or stockindices trend the most?" Poulos's methodology involved measuring the difference between the highesthigh and the lowest low for seven channel lengths (days) from 1 to 49. The range was averaged to arriveat an average channel height for one-, two-, four-,nine-, 16-,25-, 36- and 49-day channels. Each averagewas divided by the average for the one-day channel to arrive at a ratio.Applying the same methodology to several market indices and seven stocks provided some enlighteninginformation. A spreadsheet program was used for the calculations on data transferred from a chartingprogram. Only those securities with histories dating to back before 1985 were used. Data for any holidayswere eliminated before the trend calculations. All calculations were performed on data dating fromJanuary 2, 1985, to January 31, 1992, a period of seven years and one month.SIX SELECT
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FIGURE 1
RATIOS FOR THE OEXSize of DBAllFirst yearFirst two years
1-d1.001.001.00
4-d2.222.232.23
9-d3.433.423.42
16-d4.644.594.65
25-d5.895.745.87
36-d7.106.947.05
49-d8.257.968.03
Last yearLast two yearsMiddle one year
1.001.001.00
2.10 3.20 4.42 5.752.17 3.33 4.50 5.752.19 3.36 4.57 5.86
6.776.887.05
7.557.898.17
For each security and index, six different time periods were analyzed.
FIGURE 2
DATA FOR 7 YEARS AND A MONTHChannel Squarelength root of(days) length
7 yrs, 1 month from January 1, 1965Channel height ratio to oneOTC
SPX
OEX
MMI DJIA LLY
NME
IBM MER
TX
GM
X
1-d4-d9-d16-d
1234
1.002.704.686.84
1.002.343.675.03
1.002.223.434.64
1.002.183.354.52
1.001.862.733.59
1.002.383.795.20
1.002.313.624.98
1.002.253.524.85
1.002.283.584.91
1.002.263.504.78
1.002.253.454.64
1.002.263.454.63
25-d36-d49-d
567
9.1311.4813.84
6.437.809.10
5.897.108.25
5.726.918.03
4.48 6.645.36 8.056.19 9.41
6.327.719.07
6.227.588.86
6.217.438.63
6.047.228.34
5.857.108.33
5.847.008.06
An indication of trend tendency is if the ratio of the average channel height to the averge daily range is larger than the squareroot of the channel length. The NASDAQ index showed the greatest tendency to trend, while Xerox ranked the least.
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Stocks & Commodities V. 10:7 (313-315): Stocks According To Trend Tendency by Stuart Meibuhr
For each security, I analyzed six different time periods, which consisted of the entire data set; the firstyear, the first two years; the last year; the last two years; and one year selected from the middle. Thisensured that the ratios were independent of the selected time periods. This turned out not to becompletely true. For example, the data in Figure 1 for the OEX are shown for these six different timeperiods.Although some variations amounted to almost 10% between the smallest and the largest ratio for anygiven time period, the trends from the shortest to the longest time period remained the same.Consequently, the ratios for only the entire seven years and one month of data are reported here for theother studied securities. These results for five stock market indices and seven stocks can be seen inFigure 2.The indices and the stocks are ranked separately in descending order of their ratios. The data for the S&P500 represent only six years and seven months and differs significantly from those reported by Poulos.The data here were for the S&P 500, whereas Poulos's data represented spliced future contracts and thetime periods covered were different. The trending tendency of indices appears to increase with theincreasing number of securities that make up that index. Unfortunately, that does not explain why theMajor Market Index (MMI) (Figure 3) showed a greater trending tendency than did the Dow JonesIndustrial Average (D JIA) (Figure 4), the tendency of which was extraordinarily low. The D JIA valueswere consistently below the square root point, which, according to mathematician W. Feller, evinces alack of trends. All other indices showed strong trending characteristics, with the over-the-counter(NASDAQ) showing the strongest trending action (Figure 5).All seven stocks showed good trending behavior, with Eli Lilly & Co. (LLY ) having the biggest numbersand Xerox (X) ranking last for trending tendency. Other companies and symbols are: General Motors(GM), IBM, Merrill Lynch (M ER), National Medical Enterprises (NME) and Texaco (T X).TRADING IMPLICATIONSIf options are the tradeable, then it is imperative to follow the index on which the options are based andnot the DJIA, because the DJIA tends not to trend. The same conclusion can be drawn about stocks; theshort-term trader would prefer to deal in options on stocks that have high trending behavior. Overall, withthis methodology, the trader can ascertain the trending behavior of any security before expending timeand capital on a trade.Stuart Meibuhr trades stocks and options for his own account. He has lectured and taught oncomputerized investment topics for the past 10 years.
ADDITIONAL READINGPoulos, E. Michael [1992]. "Futures according to trend tendency, S TOCKS & COMMODITIES, January.
Figures
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FIGURE 3. The Major Market Index when compared to the DJIA has a greater tendency to trend,even though there are fewer stocks in the MMI.
FIGURE 4. The DJIA showed less tendency to trend than the Major Market Index did.
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FIGURE 5. The NASDAQ index demonstrated the highest degree of trending tendency.
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Stocks & Commodities V. 10:1 (38-42): Futures According To Trend Tendency by E. Michael Poulos
Futures According To Trend Tendencyby E. Michael Poulos
Not all markets have the same tendency to trend. E. Michael Poulos uses his February 1991 STOCK &COMMODITIES article, "Of trends and random walks," on the random walk index, which separates trendsfrom random drifts by allowing for trend, as the basis of this article. He explains that the commodityfutures you may for one reason or another assume trend strongly may not in fact. By using similarmethods as previously, he produces a table of 28 commodities futures and debunks some futuresassumptions — for instance, there is a school of thought that assumes that crude oil, gasoline andheating oil all show similar trending tendencies, whereas in truth crude oil and gasoline are near the topof the list, and heating oil, the poor country cousin, comes out only near the middle. Poulos goes intowhy.
W
hich futures trend strongest? My February 1991 article, "Of trends and random walks," explained
how the random walk index, which separates trends from random drifts by al- lowing for the directmeasurement of trend, could be used toward this end. (See sidebar, "The random walk index.") By usinga view of price-time history similar to the one used previously, we can determine how to rank variousfutures according to their inclination of trend. We attempted to maintain objectivity by not requiring thearbitrary choice of a predetermined fixed lookback interval (for example, the length of a movingaverage). Other attempted rankings of this kind are often questionable in result because they do notspecially distinguish between random drifts and trends.Some results may surprise you. For example, do you believe wheat trends stronger than corn? Or cattletrends stronger than hogs? Wrong. Cattle and wheat are the weakest of the 28 futures covered here. Corn,on the other hand, ranks near the top, sixth out of 28. Do you figure crude oil, gasoline and heating oil allshow the same tendency to trend? Wrongo! Crude oil and gasoline are near the top of the list, while
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Stocks & Commodities V. 10:1 (38-42): Futures According To Trend Tendency by E. Michael Poulos
heating oil is well down toward the middle.Some explanations are in order. The average channel height for yen (Figure 1) provides some. For thefour-day channel length, for example, we start at Day 4 and look back for the highest high and the lowestlow from Day 1 through Day 4. We record that high to low difference. We then repeat the above for Day2 through Day 5, 3 through 6 and so on. We then average all these heights to get the average channelheight figure for four day channels. This process is then repeated for each of the a various channel length(that is, lookback intervals). The 2.29 ratio on the four-day row for yen is obtained by dividing theaverage four-day channel height by the average one-day channel height (141.7 divided by 62.0). For thesake of brevity, we show the average channel height only for yen, but the same procedure was used for all28 futures (Figure 2).As we indicated in "Of trends and random walks," these ratios follow, but tend to consistently exceed, thesquare root of the number of days. Notice that wheat, the weakest trender, barely manages to get beyondthe square root figures (recall that 3 is the square root of 9, 4 is the square root of 16, and so forth).Mathematician W. Feller showed that a "random walk" generated by tossing a coin (one step forward ifheads, one step backward if tails) would show a displacement from the starting point, depending on thesquare root of the number of tosses.The consistent move beyond the square root point seen in all markets is evidence of trends. The yenclearly shows the strongest trending action, with its ratios well beyond the square roots, while wheatshows much less evidence of trends.
"There are times, Loretta, when I wish I had remained a teacher at the Harvard business school."
The price data used for this study were spliced nearby futures contracts. The splicing is such that the datafile is always in the highest-volume nearby contract, with any price gap on rollover days shifted out byadjusting the new contract. The historical period was January 1987 to June 1991, four and a half years.The rankings of the British pound and wheat were two of