Trend analysis

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A short overview of the new age of technical analysis, where a previous art form is transformed into a science. The public sees nothing but nonsense on television. Golden Cross, wedges, head and shoulders, and other popular "eye of the beholder" chart formations have been replaced with quantitative research. Welcome to the new age of technical analysis.

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Trend analysis

  1. 1. Creating a Trend Following Strategy through Research and Innovation By John Sheely Copyright 2013 John Sheely All Rights 1 Reserved
  2. 2. Risk DisclosureThere is a very high degree of risk involved in any type oftrading. Trading or Investing in stocks, commodities,FOREX, or options is not suitable for all investors. Pastresults are not indicative of future returns.Individual performance often depends upon an individualsunique skills, time commitment, and effort.All comments made herein are for educational purposesonly and should not be construed as investment adviceregarding the purchase or sale of securities, options,futures, forex, or any other financial instrument of anykind. Consult with your investment advisor before makingan investment decision regarding any asset classmentioned herein. 2
  3. 3. HYPOTHETICAL RESULTS DISCLAIMERHypothetical Performance results has many inherent limitations, someof which are described below. No representation is being made thatany account will or is likely to achieve profits are losses similar tothose shown. In fact, there are frequently sharp differences betweenhypothetical performance results and the actual results subsequentlyachieved by any particular trading program.One of the limitations of hypothetical performance is that they aregenerated with the benefit of hindsight. In addition, hypotheticaltrading does not involve financial risk and no hypothetical tradingrecord can completely account for the impact of financial risk in actualtrading. For example, the ability to withstand losses are materialpoints which can adversely affect actual trading results. There arenumerous other factors related to markets in general or to theimplementation of any specific trading program which cannot be fullyaccounted for in the preparation of hypothetical performance resultsand all of which can adversely affect actual trading results. 3
  4. 4. Dow Jones Industrial Daily ChartCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedFrom this blank canvas, new traders and investors are asked to decipher this raw data toformulate 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. Copyright 2013 John Sheely All Rights 4 Reserved
  5. 5. Dow Jones Industrial Daily ChartCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedMost traders are familiar with moving averages. Moving averages can be helpful intrend analysis, but they can also lead to many false signals. By themselves, theygenerate returns only when there is a long-lasting and persistent trend. Copyright 2013 John Sheely All Rights 5 Reserved
  6. 6. Dow Jones Industrial Daily ChartCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedMany traders and investors watch price levels of support or resistance. While this isvery popular, price movement through these price levels often lead to false breakouts. Copyright 2013 John Sheely All Rights 6 Reserved
  7. 7. Dow Jones Industrial Daily Chart Created with TradeStation© TradeStation Technologies, Inc. All rights reservedThe frequency in which trend signals result in false signals or trends of a short duration is higher thanmany traders expect. Research in trend analysis supports the fact that most trends are brief andtravel short distances. Only a few trends travel great distances when measured in average true range. Copyright 2013 John Sheely All Rights 7 Reserved
  8. 8. The Exceptional Trend Created with TradeStation© TradeStation Technologies, Inc. All rights reservedSome trends do travel great distances and can lead to great returns for the investor andtrader. However, these gains must be balanced with the losses that occur with false signals. Copyright 2013 John Sheely All Rights 8 Reserved
  9. 9. The Disaster Created with TradeStation© TradeStation Technologies, Inc. All rights reservedWhile one stock or commodity is generating excellent returns, another is generatingpersistent losses. Copyright 2013 John Sheely All Rights 9 Reserved
  10. 10. One Strategy for Every MarketCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedThe 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 soundmoney management strategies. The end result is an expectancy of profitability over time. Copyright 2013 John Sheely All Rights 10 Reserved
  11. 11. From New Research Comes New IndicatorsCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedAfter thousands of hours of research in trend analysis, new indicators can be createdthat combine some of the best elements of older technical indicators. These are notmodifications of old indicators, but new indicators based upon an original design. Copyright 2013 John Sheely All Rights 11 Reserved
  12. 12. A Single Strategy of Analysis for all MarketsCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedBy using a single strategy to define the trend, we can be more confident we are devisinga sound trade plan to engage the markets. There will still be many false and losing trendsignals. Research reveals this cannot be avoided. However, over time positive returnscan be expected, if the future prices behave like prices behaved in the past. Copyright 2013 John Sheely All Rights 12 Reserved
  13. 13. Taking Advantage of the ResearchCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedFrom the original blank canvas, we can create a trend strategy that is combined witha money management strategy. Knowing that trends can end at any time, we cantake profits at certain price levels based upon average true range from our trendentry price. We hold through the market corrections within the trend, as long as ourindicators stay bullish in a rising market or stay bearish in a falling market. Copyright 2013 John Sheely All Rights 13 Reserved
  14. 14. Putting the Daily Trend Signals in the Context of the Trend of the Weekly Trend Created with TradeStation© TradeStation Technologies, Inc. All rights reserved 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. Copyright 2013 John Sheely All Rights 14 Reserved
  15. 15. Most Trends Do Not Move Great Distances Created with TradeStation© TradeStation Technologies, Inc. All rights reservedThese profit objectives are based upon ATR. This is far more effective than profit targetsbased upon a percent of price. Why? Each separate commodity and especially separatestocks do not have a similar volatility when measured in percent. Two stocks, both with thesame price of $50, may have entirely different daily ranges when measured in percent. Onestock may move 2% of price on a daily basis and the other $50 stock may move 5% of itsprice on a daily basis. This requires a different strategy for both stop losses and profittargets for each of the stocks. Copyright 2013 John Sheely All Rights 15 Reserved
  16. 16. Commodities are not More Volatile than StocksCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedMany traders and investors believe that commodities are more volatile than stocks. This issimply 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 thecommodity account. Now that commodities are traded around the clock, gaps, such asseen above, are now rare events. They are not rare in stocks. Copyright 2013 John Sheely All Rights 16 Reserved
  17. 17. A Tale of Two Stories – Yen and Australian Dollar Created with TradeStation© TradeStation Technologies, Inc. All rights reservedSome trends do move long distances, but most do not. If the weekly trend is flat, trend signalswithin the daily chart should be reduced in size or an entirely different strategy is to be employed. Copyright 2013 John Sheely All Rights 17 Reserved
  18. 18. Stock IndexesCreated with TradeStation© TradeStation Technologies, Inc. All rights reservedOf course, you are only seeing a base systematic approach. Much greater detail isadded to the final script. However, you can get a sense that you can combine researchto analyze prices for greater potential. Copyright 2013 John Sheely All Rights 18 Reserved
  19. 19. Commodities Created with TradeStation© TradeStation Technologies, Inc. All rights reservedWhile many Gold Bugs were wondering if the price decline was real in gold, an analysisof price was indicating a bearish trend and rejecting any potential buy signal. Copyright 2013 John Sheely All Rights 19 Reserved
  20. 20. 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. Copyright 2013 John Sheely All Rights 20 Reserved

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