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<B><FONT size=+1>NEW TECHNIQUES
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<BR><BR></FONT><FONT size=+4>Trading The Trend
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</FONT><I>by Andrew Abraham<BR>
<HR>
</I></B><I><FONT size=+1>Here's a volatility indicator, presented here with
simple trend rules for trading various markets.</FONT></I><BR>
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<P><FONT size=+2>N</FONT>ew traders quickly become familar with two adages:
"The trend is your friend," and "Let your profits run and cut
your losses." Many of us, however, have learned the hard way that these
things are easier said than done. Why is that? One reason is lack of
recognition, since the trend itself is rarely clarified and defined, let
alone where it starts and ends. So we need a clear explication of what a
trend is as well as where its beginning and its end are.</P>
<P><BR><B>SIMPLE ENOUGH</B></P>
<P>Simply, if the trend is considered up, then the trend of prices are
composed of upwaves and the downwaves are countertrend movements. Downward
trends are the opposite, seen as downwaves with countertrend upwaves. Using
several tools and functions, we can design a quantifiable approach to
defining these waves. My favorite is the volatility indicator, which is a
formula that measures the market volatility by plotting a smoothed average
of the true range. The true range indicator originates from the work of J.
Welles Wilder Jr. from his <I>New Concepts in Technical Trading Systems</I>.
The definition of the true range is defined as the largest of the following:
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<LI>The difference between today's high and today's low
<LI>The difference between today's high and yesterday's close, <I>or</I>
<LI>The difference between today's low and yesterday's close. </LI></UL>
<P>The calculation uses a 21-period weighted average of the true range,
giving higher weight to the true range of the most recent bar. The final
value is then multiplied by 3.</P>
<P>The volatility indicator is used as a stop-and-reverse method. Let's say
the market has been rising, then the volatility indicator is calculated each
day and subtracted from the highest close during the rising market. The
highest close is always used, even if there has been a series of lower
closes since the highest close. If the market closes below the volatility
indicator, then for the next day, the current reading of the volatility
indicator is added to the lowest close. This step is followed each day until
the market closes above the trailing volatility indicator.</P>
<P>We now have a definition of the trend. An upward trend exists as long as
the volatility indicator is below the market and a downtrend is in force if
the volatility indicator is above the market. To visualize these waves, we
color-code the uptrends blue and the downtrends red (Figures 1 and 2).</P>
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<P><BR><B>FIGURE 1: CHASE MANHATTAN BANK. </B><I>Use the volatility indicator to
signal the direction of the trend. Here, uptrends are in blue, and downtrends
are in red.<BR>
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<BR>Andrew Abraham is a trader and a Commodity Trading Advisor with Angus
Jackson. He may be reached via E-mail at info@xxxxxxxxxxxxxxx</I><BR>
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<H5><I>Excerpted from an article originally published in the September1998
issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights
reserved. © Copyright 1998, Technical Analysis,
Inc.</I></H5></BLOCKQUOTE></BODY></HTML>
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