Saturday, October 12, 2019

How do you define a trend?

The past has happened. The future doesn't exist.

Therefore, we can only react and respond to what is happening in the moment of now.

So, for traders the question is, what is price doing now?

The tricky bit is how you define "what is price doing now".

For trend followers, you can only answer that question in one of three ways:

  • price is going up;
  • price is going down; or
  • price is stuck in a range.
But, before you can answer that, you have to give the question some context. To do that, there are a couple of additional questions you need to answer:

1. What is your chosen timeframe? and

2. How do you define an uptrend, a downtrend, and a non-trending, rangebound market?

How I define what price is doing may well be different to how you define it.

As Ed Seykota says, there is no such thing as 'THE' trend.

Your own method is designed to give you a framework which gives a signal of when to interact with a market, be it an entry or an exit - nothing more, nothing less.

"The market being in a trend is the main thing that eventually gets us in a trade. That is a pretty simple idea. Being consistent and making sure you do that all the time is probably more important than the particular characteristics you use to define the trend." - Richard Dennis

There is no magic set of parameters that will get you in and out of every trend near the beginning and the end.

The problem is that a certain set of parameters, on a particular timeframe, may work well for a specific period of time, in specific market conditions. But you are at the mercy of the buying and selling of other market participants, who will move the market for you or against you.

And, if you are an advocate of the principles set out by Mark Douglas in Trading in the Zone, you know that any market can change 'state' (trending or non-trending, stable or volatile) at any time, for any reason. And you have no control over that.

As a result of this, the markets may go through phases where, based on your own definitions, longer-term trends may work better than shorter-term trends, or vice versa.

But the key here for your own trading is ensuring you answer those questions and getting clear in your own mind how you define what is price doing, and from there ensuring you take action based on your own signals, regardless of what others may say or be doing.

To quote Richard Dennis again:

"When we taught our people to trade, I had a hypothetical question: Suppose everything you know about a market indicates a "buy". Then you call the floor and they tell you that I'm selling. Do you: (a) buy, (b) go short, (c) do nothing? If they didn't eventually understand that (a) was correct because they have to make their own market decisions, then they didn't fit into the program."

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