| The term "trend" is bandied about with fierce | | | | on the Commodity Channel Index. While this definition |
| regularity among traders of all types. Long-term | | | | may seem a little technical, it is fairly accurate. Hence, |
| traders look at trends in a far different perspective | | | | I seldom initiate trades when the market price action |
| than short-term traders. Which leaves most traders, | | | | is in the area between +100 and -100. |
| especially novice day traders, in a quandary. In | | | | Another handy definition can be found using the |
| general, a market trend is the tendency of the | | | | NYSE tick indicator. I use a similar methodology with |
| market to move in one direction for a period of time. | | | | the NYSE tick indicator, and consider any market |
| I think that's where most traders become confused, | | | | movement between +400 and -400 market noise. |
| as the "period of time" is a variable of many | | | | Just like that Commodity Channel Index, I see to |
| dimensions. | | | | avoid making any trades during these periods of |
| Ultra-long term market trends can be measured in | | | | market noise, or normal backing and filling operation |
| periods of 5 to 20 years. On the other hand, a day | | | | of the market. |
| trader may look at a trend in terms of hours. With all | | | | There is some misconception about what a trend |
| this diversity in the period of time it takes to | | | | looks like on a chart. Many new traders expect a |
| establish a trend it is often difficult to specifically | | | | trend to be a straight line up for down (depending on |
| define what qualifies as a trend. | | | | whether he you are considering long or short trades). |
| Before we go much further, I think it is important to | | | | But any trend will go through periods of retracement |
| understand that in the academic world there is no | | | | in the course of a normal trend. Often times, |
| trend. The current theory being taught, Efficient | | | | Fibonacci analysis is used to calculate the strength of |
| Market Theory, claims that equity pricing always | | | | the retracement, though it is not necessarily |
| discounts all known factors into the current price of | | | | imperative. My point here is a simple one; the market |
| the equity in question. That being said, there is no | | | | will advance for a period of time, and then retrace its |
| room for the term trend in efficient market theory | | | | advancement for while, sometimes up to 50% or |
| because each price properly equates the value of an | | | | more of the initial advance, then resume trading in |
| equity any given time. To take this to the point of | | | | the direction of the original trend. The resulting price |
| ridiculousness, Efficient Market Theory would have to | | | | action line on the chart resembles a serpentine |
| accept the notion that a given equity increases in | | | | pattern in definite direction. Trends seldom move in |
| price and value, at least intrinsic value, from minute to | | | | an absolute straight line, though euphoric buying and |
| minute. Of course, recent financial calamities in the | | | | panic selling can create a spike that moves straight |
| markets have led to no small amount of skepticism | | | | up or down. In my opinion, spikes in the market |
| among traders and Efficient Market Theory. I would | | | | cannot be defined as trends as they are usually the |
| also note that traders, as a whole, have never | | | | result of some unusual market activity, world |
| embraced Efficient Market Theory. | | | | catastrophe or political unrest. |
| For intraday trading, which is really no more than | | | | So we have come up with some finite definitions to |
| trading during a daily trading session, we need to | | | | define market noise and trend. A trend will move in |
| devise a workable definition to define the term trend. | | | | one direction in a serpentine pattern, while backing |
| Depending on which book you care to read, most | | | | and filling operations usually indicate a consolidating |
| economists and financial authors claim that the | | | | pattern in the market where the price action tends |
| market trends between 30 and 40% of the time. | | | | to stay in a narrowly defined channel. We also have |
| The remainder of the time the market is involved in | | | | noted that trends can mean a variety of things to |
| normal backing and filling operations. I define these | | | | different traders or investors, and the term "time |
| backing and filling operations as market noise and | | | | period" is essential to understand as it relates to |
| tend to avoid trading during these periods. Another | | | | trends. Trends can be as long as 25 years and as |
| more workable definition for non-trending markets, at | | | | short as an hour. The term trend is closely related in |
| least in the system I trade, is time the market | | | | definition to the style of trading each trader employs. |
| spends wandering between the +100 and -100 lines | | | | |