What Is A Trend, Anyway?
by John Sweeney
A reader reacting to the Settlement article in January on trading basics (Settlement, "Trading simply:
Minimizing losses," Stocks & COMMODITIES, January 1991) asked a key question: What is a trend? How
do I identify it when I'm trading? (Personally, I use dual moving averages.) Most of us could think of a
number of ways of defining trends, but it fascinates me what our analytical methods tell us about our own
thinking. Typically, our thought of "trend" amounts to no more than drawing lines upward or downward.
I think it should also encompass drawing them horizontally.
The trend is our friend, we think, because that's when price changes occur in some unidentified, regular
progression upon which event we make money. Questioning the key elements — persistent movement
over time — by looking at charts, it's evident that tradeables can move smoothly, like the Eurodollars in
Figure 1 or Treasury bills (Fed managed), or abruptly, like, say, gold, which is notorious for opening $20
away from where it's been for the last six weeks (Figure 2).
My conclusion? Trending behavior varies by tradeable and is more apparent in "managed" prices (such as
specialist supported stocks and short-term interest rates) or markets of mammoth size where the sheer
number of participants precludes truly abrupt change — say, debt and currencies. Despite this, we look
for (hope for?) a straight line progression of prices from one level to another, hence the urge to draw
straight lines on all charts of fluctuating prices.
By drawing straight lines, are we really trying to model this variegated behavior or just expressing our
own preconceptions and, thus, limitations of thought? Prices do exhibit persistence (that is, statistical
dependence): they usually open "around" where they closed and the next price is "around" where the last
price was. However, even if that phenomenon justifies describing that behavior with a single line, I can't
think of a reason for it to be straight. Though straight lines can be powerful analytical tools (Figure 3),
our strong preference for them is foremost our own wishful thinking.