V.11:9 (382-386): Rating Trend Strength by Tushar S. Chande

Rating Trend Strength by Tushar S. Chande

Here's a simple indicator of trend strength. It goes like this: A value of +10 signals an uptrend; a value of -10 signals a downtrend. Stocks & Commodities Contributing Editor Tushar Chande uses this simple rating system to help answer the eternal traders' question: Is the market trending?

As you may have noticed, a number of rather complicated indicators are available to measure trend strength. None of these indicators, unfortunately, is perfect. You could use J. Welles Wilder's average directional index (ADX) as an indicator of trend strength, or perhaps the r2 value from linear regression analysis. Or you could even use the vertical horizontal filter (VHF) to help determine whether the market is trending.

Each of these indicators requires the user to determine how many days' data should be used in the calculations. As you vary the indicator length or number of days used in the calculation, however, the result of the calculation changes also. Thus, there is no unambiguous answer. If the market were about to enter or leave a trading range, you could get a different indication of trend strength every day — a frustrating set of circumstances.

RATING THE TREND

Here is my way of rating a trend, a method I call trendscore. If today's close is greater than or equal to the close x days ago, score one point. If today's close is less than the close x days ago, the trend's rating loses one point.

Next, compare today's close to the close x+1 days ago. If today's close is greater than or equal to that close, score another point. Deduct one point if the close is lower than the prior close.