Friday, October 17, 2014

Looking at the big swing

There have been plenty of people quick to pronounce that the current move down has already finished, with a short-term price floor put in, following the price action over the last couple of days.

I've shown below charts of the FTSE, DAX, Dow and the Russell 2000 which clearly show the current trend is still intact, and indeed prices can move a decent amount against the trend before invalidating them. I've also shown the 200 day exponential moving average on the charts, which a lot of people use, and again price can move some way back up before reclaiming ground above that average.

It is also clear that, even disregarding the moving average and the price channels shown, there is no pure price pattern with a higher low being formed at this stage.

The one chart 'pattern' that trend following systems often struggle with is when the stock or instrument puts in a 'V' shaped reversal. In those situations, the trailing stop does not have time to move sufficiently to lock in any profits on a move. These kinds of reversals can and do happen, and can be frustrating to a trend follower. However, we have to look to the logic of such a system. If you want to catch a big move in a market, then price must be given a certain degree of freedom to move up or down and avoid knocking you out of a significant trend. Use too tight a trailing stop, and you could be kicked out and left on the sidelines.

"Disregarding the big swing and trying to jump in and out was fatal to me. Nobody can catch all the fluctuations... Men who can both be right and sit tight are uncommon.  I found it one of the hardest things to learn.  But it is only after a stock operator has firmly grasped this that he can make big money." - Jesse Livermore

Now, no one knows if that is what is going to happen here. All we can do is play the odds, and at the moment, on my timeframe and with my parameters, the downtrend is clearly intact. Price and its movements will tell me when that is no longer the case.

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