V.13:08 (345-347): Trending on a Historical Basis by Alex Saitta The question is as old as technical analysis itself: Does the market trend? Here's a method to determine the degree to which markets trend historically. In addition, there's a comparison of various markets based on the observable degree of trend. In the pursuit of profit, most traders spend hours each day trying to forecast whether the market is about to trend upward or downward. However, some traders pursue their quest for profit in a different way. These traders are not concerned with the direction the market will move; rather, they are concerned with whether the market tends to move for a significant length of time - does the market tend to trend? These traders use a trend-following trading method (for example, moving averages) as a way to capture market profits. Instead of having to identify whether the market is about to go up or down, however, the trend-follower must determine if the market has a tendency to trend. TO TREND OR NOT TO TREND? Although it may seem easy to identify whether a market tends to trend, to the naked eye this can be difficult to ascertain. Take a look at the two series shown in Figure 1. One is random - that is, consecutive prices are not correlated. The other is trending - consecutive prices are correlated; that is, when the most recent price rose (or fell), the probability the price would rise (or fall) the next day was 60%. By looking at these two charts, can you tell which series is random and which one trends? |
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