Blind Freddy Trends
We are frequently asked: "What is a Blind Freddy trend". The term ( often abbreviated to simply a "BF trend") was coined by members of the Chart Forum to describe a strong (or runaway) trend; one that even "blind Freddy" could spot. Here is a brief summary.
The way I see it, the term 'blind freddy trend'
has nothing to do with technical analysis as such.
Trend identification isn't always straightforward and there are many definitions of what constitutes an uptrend or downtrend. Add multiple timeframes and things get complicated.
You've had a look at Rocky's excellent trend analysis. That analysis takes times and you can't do it on every chart if you're scanning the whole market. Sometimes the trend is just so plain to see that you don't even bother wasting time analyzing it to technical definitions.
Sometimes it helps just to look at a chart for 3 seconds — shut your eyes — and say whether it's up or down.
Any five year old, my pet kelpie [she's pretty smart], or Blind Freddy can do the same thing.
Rocky had set the foundations in an earlier post:
Rocky: ......if I am unsure of the current trend I ask my 6 year old daughter and she tells me which way to trade. Moving average crossovers are a good indication of the trend changing direction but instead of using a fixed number on all charts, scrunch up the shares you are watching and try different combinations say 8/16 10/21 or whatever. Look for the two that don't give too many false signals but give an entry signal regularly for each different stock. You will find that some will have quite long periods and other will have 3/9 periods. Then to be safe, wait for a higher bottom to develop after the crossover before you buy and place a stop loss a few cents below this higher bottom. Another key is to only trade stocks that have a history of trending for reasonable periods of time. Many stocks are so volatile that they aren't worth watching and no sooner will you get an entry signal you are out again.
He then gave a number of examples.
A two-day reaction ending December 12th that sits on
top of a previous swing high like this (leaving a space in price is better,
of course) is the first indication that an up—trend is starting, possibly a fast one.
The double bottom in the up—trend on Jan 8th and 12th (note the lows are 30 days apart — a typical Gann time cycle) also indicates a trend with great strength.
These subtle signals the Stock has been giving offer a far earlier entry into this trend than waiting for a breakout that may or may not confirm.
Buying breakouts is often a risky proposition — being on board when they happen is sweet.
Most users employ three simple moving averages: 7—day, 18—day and 30—day; while Rocky used 6, 16 and 30 on some earlier charts. Some members later evolved a system using just two MAs: 10—day and 30—day exponential moving average crossovers (and 10—week and 30—week EMAs for long—term trends). The length, or type, of MAs used is not critical to the system: use your own if you prefer.
The MAs are not used in a conventional Three Moving Averages fashion (where the fast MA must rise above the medium MA, and the medium MA rise above the slow MA, for a valid up—trend). The slow MA (or sometimes middle MA —— see CBA chart below) is discarded if the other MAs offer a better fit on available price history. Signals are taken from the remaining Two Moving Averages.
Rocky: I just had to post this chart — this is a powerful example of why I like this setup and the US market so much...
This Stock gave a BF buy signal at around $45, powered away, had a 2 day reaction and then leapt 16% on Thursday night to close above $56.
Here is an earlier example of a 6—day and 16—day crossover:
In a strong trend, the swing low will often not overlap the previous swing high, leaving a space (or gap) that confirms trend strength. I believe that this concept was first introduced by Bill McLaren, who also counts the number of bars in a reaction to determine trend strength —— another concept discussed below. For a full exposition, see Bill's DVD/video: Foundations for Successful Trading.
Rocky: The space left from the low of December 11 back to the previous swing high made on November 25 was the first indication that a 'Blind Freddy' trend (discussed elsewhere in the forum recently) had the potential to unfold. See chart below —
Since that time, the largest reaction to the rally has
been 2 days (up until Friday), and there has been a space in price between each
subsequent swing high and the swing low that follows, indicating a very fast
move underway. The sellers have been overwhelmed on each occasion and the buyers
have won the day — the very essence of an up trend.
Standing in front of this type of trend, without some indication it may be coming to an end (lower top, blow—off gap and reversal) is not the way to make a lot of money trading.
Yes this could be a top, but the highest probability trades have been buying during the pullbacks, not trying to pick the end of the move.
This is danger of relying on indicators — they often get overbought or oversold very quickly and stay there for several days (or weeks?).
Count the days of the reactions — if the Stock is going up 6 days and down two, the trend is strongly up — that's the way to trade until it gives some tangible evidence that the trend is changing.
Rocky ..... Even though you have spent considerable effort
in setting out your BF system they are scattered around a number of posts and I
thought it might be useful to try and distill them into a single statement...........
Below is the system for going long — going short is the exact opposite.
- A swing low must either be higher or equal to the swing high prior to the higher high currently retracing
- 10 Day
has crossed above 30 Day
(Rocky later confirmed that he still uses 7—day, 18—day and 30—day SMAs)
- Real breakout of downtrend
- 30 Day EMA trending upwards
- If reaction more than 4 days best not to enter position.
- Watch CURRENT resistance levels — not old swing highs and lows
- Trade a fixed number of cents above the lowest high of the swing low depending on the previous price characteristics of the stock. Can be varied where this is near the previous swing high.
- Best if reactions only 3 days and then takes out swing high within 3 days
- Reactions should not last more than 4 days and price bars remain above 10 and 30 day EMAs and trendline.
- If stock makes new high and retraces to rest on old high an explosive move may occur
- Initial stop below last swing high then when new swing high established move stop to below the last swing low.
- Number of cents below each level depends on previous price character of the stock.
Indo later went on to explain that the breakout from the down—trend (trendline break) may occur some time before the BF setup.