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June 20, 2005

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I have spent several weeks investigating trend-following systems, with some interesting results:

Directional Movement v. Weinstein

An often-discussed system for tracking trends is the Directional Movement System set for weekly, rather than daily, directional movement. We compare performance to Stan Weinstein's breakout model, which combines a 30-week weighted moving average with trendlines and support/resistance.

Time Frames

Normal settings are 11-week Directional Movement. This is sometimes combined with Parabolic SAR to act as an additional filter. I have opted for a simpler system, entering on the next pull-back after the DI/ADX signal.

Trading Signals

DMS makes frequent whipsaws when not in a strong trend; so it is important to have an additional filter. My preference is for Alexander Elder's system, where ADX must be rising before the signal is taken......

To read the entire article, click here.
Or skip to the conclusion (below):

Conclusion

Late Directional Movement signals are not compensated by increased reliability.

The one aspect of the DM system that I was impressed with was the ADX down-turn from above 50. It provides early signals for the expiry of strong trends, with roughly a 2:1 success rate when the signal occurs. Most of the misfires take you out of the trend too early; so it could be used as a signal to move your stops up to below each consecutive swing low (similar to how Stan Weinstein alters his stop-loss rules when the MA flattens out).

That may be a useful addition to Stan Weinstein's breakout model which is often exposed by late exits from blow-off trends. Despite this flaw, I have yet to find a better trend following system.

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Moving Average of Highs and Lows

A new variation on the moving average system is to calculate moving averages on the Highs or Lows, rather than on the Close.

Time Frames

Daily Highs and Lows are normally used, but the same concept may work just as well on hourly, weekly or even monthly bars.

To read the entire article - click here.

Including:

Trading signals
Construction
Setup

Or skip to the Evaluation.

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:

Stan: 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.

There is more to a Blind Freddy Trend than just a 3-second look. To read the entire article - click here.

Including:

Basic Requirements
Trendline Breaks
MA Crossovers
Higher Bottoms

Or skip to the Summary.

Regards,
Colin Twiggs

Firmness cannot show itself, of course, if a man keeps changing his mind.
It demands sticking to one's convictions.

~ Claus von Clausewitz: Vom Kriege (1831)

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