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Which Way Did It Go...George?
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A famous line from an old popular Saturday Morning cartoon. George's
companion always seemed to lose direction and would then repeatly say,
"Which way did (he) go, George?."
Seems not too few a trader falls under this same indecision as to the
direction the market is taking...now. Looking at the same chart, if you
asked 10 traders which way they thought the market on the chart was
trending, you'd probably get 4 say up, 4 say down, and 2 say sideways.
Consider the chart that is attached to this message. If you are unable
to see it, take a look at the October 97 Live Cattle chart from May 97
to the present.
What do you see? Is the trend in this market up, or down?
If you stand back and look at the complete chart, you've got a higher
high than the previous. Up trend, right? Not necessarily. Look at all
the lower highs and lower lows since the top on 7/29. Doesn't this look
like a down trend? Sure. Is this market then in a down trend? Not
necessarily.
Notice that the present bottom is still above the bottom of 7/22/97.
Until that bottom is taken out, we can say we are in an up trend, right?
Not necessarily.
Notice the lower highs and lower lows from the 7/31 high. Down trend,
right? Not...you know.
I think by now I've made my point. "Which way is it going, George?"
It all depends on the 'scale' or time window you happen to trade in. We
are not even going to consider the weekly, monthly or even yearly charts
as they will also change ones perception of trend direction.
I'm a short term trader. My trades don't normally last longer than a few
days. When I talk about the trend, I am referring to the trend most
likely in the micro sense. I'm more concerned with each individual days
range than the last few weeks at a glance.
For example: We start at a bottom on the chart and we call it (A). This
bottom is selected because it is lower than the day before and the day
after in price for a bottom. Now, we know the next day has a higher
bottom and a higher top. If each day continues with a higher bottom and
top, I'm currently going up. Yet, my trend is not considered up until I
pass a previous top, a 'day' which was higher than it's previous and
after day. Once my current run up passes this high, I'm now officially
in an uptrend at a 'micro' level. If by chance the next day makes a
lower low and high, my trend is still up until it takes out the low at
(A). Once it does that, then I'm in a downtrend at a 'micro' level.
Now, while all this is going on, we may still be in an uptrend in a much
higher scale. These up and down trends I trade at may all be part of one
big move up which hasn't reached its top yet. Therefore, if one was to
ask me what I thought the trend was, if my 'micro' level is moving down,
I'd say down. If that trader were to look at the charts, he/she may not
see what I am looking at.
I find that if you are going to trade, you need to decide the scale at
which you are going to trade and make sure you can discern the trend for
that scale. Once you can do that, you then can work back to the larger
scales to note if they are also going in the same direction as your
scale. If they are, you increase your probability for a bigger move in
your direction as opposed to going against it.
Long term traders are not interested in my 'micro' scale of trend
analysis. It appears as noise. Quite understandable. Those who do trade
for the short term would do well though to understand the 'micro'
analysis of a trend. It would even be advisable for long term traders to
at least use this type of trend analysis for fine tuning their entry
timing.
Rules are quite simple for 'micro' trend analysis, or any other level
you choose. Here are some to consider:
1) Find a top or bottom to start from. If it is a top, the day before
and after does not have a higher high. A bottom, the day before and
after does not have a lower low.
2) Each day afterwards if the prices make a higher top WITHOUT making a
lower low as well, we are going up. However, the trend is not considered
up UNTIL it passes a previous top as defined in Rule #1. Reverse this
explanation for days going down from a top.
3) If a day provides neither a lower low or high, just ignore it.
4) On days that makes both a higher high and low, look at it as a change
in the current move. In other words, if we were making higher highs and
lows, and then a day comes along and makes both a higher high and lower
low, look at this as a lower low and ignore the prices that exceeded the
previous days high. We have a down day. If the next day makes a lower
low and high, you are now moving down. Reverse this explanation if
starting with lower highs and lows.
5) Your trend is up once your higher highs and lows make a price above a
previous high as defined in Rule #1. Your trend is down when your lower
highs and lows make a price below a previous low as defined in Rule #1.
This is the 'micro' trend. Best to always trade your short term trades
in its direction (most of the time).
Treat it like you would any trend. Go in the direction of the trend
AFTER it has completed it's retracement/rally. So if you have a micro
trend going up, and then it starts making lower highs and lows, if this
movement down STOPS and turns BEFORE going lower than a previous bottom
as listed in Rule #1, you have a BUY opportunity. Work this with your
other methods. NO indicator stands alone.
I wish you all profits and fun!
cheers!
:)
rick
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