Identifying Market Trends by Jack Karczewski
The trend of the market is key to most every technical approach available. But the market doesn't always trend. Here's how to use a statistical tool for determining if the market is in a trend.
Traders spend untold amounts of intellectual capital analyzing a market for clues about trend. We try to determine if there is a trend present, when it began, if it has reversed or broken down. The methods employed to interpret this information range from simple chart analysis to sophisticated computer algorithms. Even simple moving averages can become quite complex when the permutations and combinations of moving averages, their various lengths, crossovers and forms such as simple, weighted and exponential, are considered.
I use one analytical method in particular to identify trends. This technique gives not only the direction, but the slope, the magnitude of the error of the prediction and the reliability of the forecast of the trend. The statistical method is referred to as linear regression. This tool has become more readily available to traders with the current standard software.