How Long Will The Trend Last? by L.A. Little
The Big Question
How Long Will
The Trend Last?
All trends begin and eventually end, but the rate at which they end is not the same
across all time frames. Find out how incorporating trend failure rates into your
trading can make you a more effective trader.
Time is the hardest element
to integrate with technical
trading. After studying many
ways that others have attempted to do
this, I somehow felt they were lacking
and still wanted to take it further.
In most engineering disciplines,
you’ll come across the concept of measuring
a product’s useful life cycle. It
is often referred to as the mean time
to failure (MTTF). Essentially, it’s
an estimate of the average, or mean
time until product failure. It is a useful
measure and is drawn from a representative
sample set of the population
under study, whatever that may be.
Mean time to failure?
Some common, everyday examples
of objects with MTTF rates include
your washing machine, your microwave
oven, or the toaster sitting on
your countertop. All have a useful life
cycle and in all cases, that expected
life cycle is estimable. They come
off the factory floor, are purchased,
and then serve their owner for some
useful period of time before breaking
and being retired.
In my book Trend Qualification
And Trading, I outlined a neoclassical
methodology centered on the notion
that not all trends are created equal.
This conclusion was reached after I
systematically studied thousands of
trading instruments across multiple
time frames in an automated fashion.
I then examined the probability of the
trend continuing based on various
attributes I observed. The most interesting
attribute where a correlation
was clearly observable was related
to volume characteristics. Volume
confirmation (confirmed trend) or
nonconfirmation (suspect trend) at
the time of a trend’s transition led to
an increased or decreased probability
of trend continuance.