Trading System, Trend Following

TME 030: Market Trends

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Market Trends

We have talked a lot in the past about trend following but how do we find market trends? We can talk about a method all day long but it would also be good if we talked about how to do it. Markets trend up and they trend down. How do we find those market trends?

To some people the market is like a rollercoaster. I’m not the type of person that likes rollercoasters. Sometimes when you go to the movie theater they put up a simulation of a rollercoaster on the screen. If I follow that close enough I feel like I’m getting sick.

That is kind of like the market. It can be somewhat like a rollercoaster. If you allow it to get to you then you might get sick.

Trending Stocks

When we are looking for trending stocks we can use different methods for our market trend analysis.

 Stock Charts

One method that we can use is stock charts. Many people look at stock charts and all they see is lines on a page. Many people don’t have a clue what they are looking at. A chart tells a story. What kind of story does it tell? Stock charts tell the history of the stock price. Charts tell us when markets trended in the past. They also can give us signals on when they might trend in the future. Stock charts do not predict the future. There is no way to know if the signal will produce a winning trade or a losing trade.

Looking through a few charts you can easily see trends on the chart. If they are uptrends you will see it. If it is a downtrend you will see that as well. SPY Long TermBecoming a Chartist is one way to find market trends.

 

 

 

Mathematical stock Analysis

Sometimes at large companies it seems that people can’t read numbers. They want everything in chart and graph format. It can be frustrating if you have to take perfectly good data and put it into chart form. You might begin to wonder if the people you are giving the chart to can read numbers.

If you are tracking 20 stocks or markets the chart might be the route you would like to take. You can flip through 20 charts within minutes. For us we use mathematics and computer programs. With the computer program it calculates the signal of when a trend begins. It helps identify when trends begin at the end of each day. We hit a button and it spits out the buy and sell signals.

We put the signals into an iPhone app. When the price hits the signaled price then we know its time to buy. It’s just that simple. The alert can be a simple high low price alert.

Example:
  • If a stock hits a 50-day high we buy.
  • If a stock hits a 50-day low we sell.

That is a simple way to find market trends.

Stock analysis

When we are doing our analysis we are looking for stock trends. We always use the variable of price. Price simplifies the calculation. Price makes it easier to find trends. Our stock trend analysis is not complicated. We don’t look over news reports. We don’t look at balance sheets. We don’t call a friend for a hot stock tip.

We simply look at price. When the price tells us that there is a trend up then we buy. When the price tells us that there is a trend down we sell short.

Conclusion

We believe in simplifying the process. Finding trends in markets is really not that complicated. Markets go up and markets go down. Our job is to increase the probability of trades that gain and decrease the probability of trades that lose. When a market has been trending in an up direction it is more probable than not that it will continue in that direction for some period of time. We want to find that trend and capture the gain.

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