Trend analysis

Creating a Trend Following Strategy through
Research and Innovation

By
John Sheely

Copyright 2013 John Sheely All Rights
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Risk Disclosure
There is a very high degree of risk involved in any type of
trading. Trading or Investing in stocks, commodities,
FOREX, or options is not suitable for all investors. Past
results are not indicative of future returns.

Individual performance often depends upon an individuals
unique skills, time commitment, and effort.

All comments made herein are for educational purposes
only and should not be construed as investment advice
regarding the purchase or sale of securities, options,
futures, forex, or any other financial instrument of any
kind. Consult with your investment advisor before making
an investment decision regarding any asset class
mentioned herein.
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HYPOTHETICAL RESULTS DISCLAIMER

Hypothetical Performance results has many inherent limitations, some
of which are described below. No representation is being made that
any account will or is likely to achieve profits are losses similar to
those shown. In fact, there are frequently sharp differences between
hypothetical performance results and the actual results subsequently
achieved by any particular trading program.
One of the limitations of hypothetical performance is that they are
generated with the benefit of hindsight. In addition, hypothetical
trading does not involve financial risk and no hypothetical trading
record can completely account for the impact of financial risk in actual
trading. For example, the ability to withstand losses are material
points which can adversely affect actual trading results. There are
numerous other factors related to markets in general or to the
implementation of any specific trading program which cannot be fully
accounted for in the preparation of hypothetical performance results
and all of which can adversely affect actual trading results.

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Dow Jones Industrial Daily Chart

Created with TradeStation© TradeStation Technologies, Inc. All rights reserved

From this blank canvas, new traders and investors are asked to decipher this raw data to
formulate a trade plan to profit from the trends that appear within this time period.
There are technical methods that can assist the trader in this analysis.

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Most traders are familiar with moving averages. Moving averages can be helpful in
trend analysis, but they can also lead to many false signals. By themselves, they
generate returns only when there is a long-lasting and persistent trend.

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Many traders and investors watch price levels of support or resistance. While this is
very popular, price movement through these price levels often lead to false breakouts.

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The frequency in which trend signals result in false signals or trends of a short duration is higher than
many traders expect. Research in trend analysis supports the fact that most trends are brief and
travel short distances. Only a few trends travel great distances when measured in average true range.

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The Exceptional Trend


Some trends do travel great distances and can lead to great returns for the investor and
trader. However, these gains must be balanced with the losses that occur with false signals.

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The Disaster


While one stock or commodity is generating excellent returns, another is generating
persistent losses.

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One Strategy for Every Market

The analysis of price should be based upon principles which are consistent with all asset classes.
Algorithms today can combine back-tested strategies over thousands of data points with sound
money management strategies. The end result is an expectancy of profitability over time.
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From New Research Comes New Indicators


After thousands of hours of research in trend analysis, new indicators can be created
that combine some of the best elements of older technical indicators. These are not
modifications of old indicators, but new indicators based upon an original design.

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A Single Strategy of Analysis for all Markets


By using a single strategy to define the trend, we can be more confident we are devising
a sound trade plan to engage the markets. There will still be many false and losing trend
signals. Research reveals this cannot be avoided. However, over time positive returns
can be expected, if the future prices behave like prices behaved in the past.

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Taking Advantage of the Research


From the original blank canvas, we can create a trend strategy that is combined with
a money management strategy. Knowing that trends can end at any time, we can
take profits at certain price levels based upon average true range from our trend
entry price. We hold through the market corrections within the trend, as long as our
indicators stay bullish in a rising market or stay bearish in a falling market.
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Putting the Daily Trend Signals in the Context of the Trend of the Weekly Trend


Algorithms can now join the information of the daily trend with the trend analysis
of the longer-term weekly chart. We can then modify our money management, in
both profit targets and stop loss levels, depending upon the longer term trend of
each market.

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Most Trends Do Not Move Great Distances


These profit objectives are based upon ATR. This is far more effective than profit targets
based upon a percent of price. Why? Each separate commodity and especially separate
stocks do not have a similar volatility when measured in percent. Two stocks, both with the
same price of $50, may have entirely different daily ranges when measured in percent. One
stock may move 2% of price on a daily basis and the other $50 stock may move 5% of its
price on a daily basis. This requires a different strategy for both stop losses and profit
targets for each of the stocks.
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Commodities are not More Volatile than Stocks


Many traders and investors believe that commodities are more volatile than stocks. This is
simply not the case, when each is measured in movements based upon a percent of price.
It is the extreme use of available margin by the new trader that creates the volatility in the
commodity account. Now that commodities are traded around the clock, gaps, such as
seen above, are now rare events. They are not rare in stocks.
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A Tale of Two Stories – Yen and Australian Dollar


Some trends do move long distances, but most do not. If the weekly trend is flat, trend signals
within the daily chart should be reduced in size or an entirely different strategy is to be employed.
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Stock Indexes


Of course, you are only seeing a base systematic approach. Much greater detail is
added to the final script. However, you can get a sense that you can combine research
to analyze prices for greater potential.
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Commodities


While many Gold Bugs were wondering if the price decline was real in gold, an analysis
of price was indicating a bearish trend and rejecting any potential buy signal.
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A Different Point of View

• One question that all traders and investors ask is whether any
market reversal from a previous trend is merely a correction
of that trend or whether the reversal is the start of a new
trend in the opposite direction.
• There is an answer to that question that is backed by
thousands of hours of research.
• In the coming months, I plan to answer that question by
introducing an entirely different way to analyze prices.
• Look for my detailed book on the subject to be published later
this year.

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Trend analysis

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