THE TREND LINE.docx 23 by alxalaa


									                                                   THE TREND LINE

                    THE TREND LINE

THE"TREND" LINE'S FUNCTION is to indicate the
existing long-term directional price energy flow.
The trend line is simply a ten-week (or 49-day as SMR
prefers) moving average of the closing price.
The basic idea of the trend line is, if the current price is
higher than it was a couple of months
ago (i.e., ten weeks ago), then the trend of the price is
presumed to be up. It is simple: If I am

heavier now than I was a couple of months ago,
the trend of my weight would be up. Or, if the
equity in my trading account is higher now than it was a
couple of months ago, then I can
correctly conclude I have been making money trading,
i.e., the trend would be up. Therefore, if
the price is higher now than it was a few months ago, we
can assume the current trend of prices
is up, and vice versa for the downside.
There is no magical, mystical, absolute significance of a
50-day, or ten-week, moving average. However,
history has shown a 50-day or ten-week moving average
is a reasonably accurate measurement of
trend over a broad spectrum of markets. Ten weeks is
long enough to filter out any short-term
aberrations of price movement, yet short enough to react
to fundamental changes in price
direction. Obviously, there will be times when a 40-day
(or eight-week) moving average will be
a more accurate reflection of current trend, and other
times when a 60-day (or 12-week) will be
more accurate. However, I have found the ten-week (50-
day) moving average works just fine. In
other words, it fully meets the criteria of being a
"reasonably reliable" indicator of price trend.
A good way to visualize price movement is to see it as a
"river" of energy, flowing first in one
direction and then the other. When looking at price
energy flows in this way, the trend is seen as
the underlying "current." In a real river the surface water
may surge back and forth depending on
the wind and/or tide, but the underlying current will keep
pushing relentlessly downstream. In
markets the same is true; the underlying current of price
energy flow (i.e., the trend) also will
tend to assert itself over time.
You are probably aware of the saying "the trend is your
friend." This saying is derived from the
second law of trading. Just as a body in motion is more
likely to continue moving in its current
direction rather than change, so too the movement of a
price is more likely to continue its current
trend rather than change. Therefore, since a clearly
identifiable trend in price is more likely to
continue than change, if you trade in the direction of the
trend, it will tend to be your friend.
Look at the charts on the following two pages (March
Unleaded Gas and March Silver). Notice
how in each of these cases the trend maintained its
direction for many months, even while the
daily and weekly movement of the price chopped up and
down somewhat erratically. Moreover,
notice how when their trends did change direction, they
then proceeded to follow the new
trends as reliably as the old. Naturally, I have chosen two
good trending markets for examples;
however, you could look through the SMR chart book at
virtually any time and you would find
many, if not most, of the markets in trends that had been
maintained in one direction for many
months. It is simply the nature of prices (and physics);
once a trend has been clearly established,
it tends to continue.
Some market theorists argue that the longer a trend has
been in effect the closer it will be to
changing direction. I believe the facts show the exact
opposite to be true. The truth is the longer
a trend has been in effect the greater the probability of
that trend continuing. Many traders avoid
markets that have been trending for a long time due to a
fear these trends just cannot go on much
longer. This is a mistake. Remember, continuation is
more likely than change.
Some traders also tend to make the mistake of primarily
looking for trades in markets where the
trend shows signs it may be almost ready to turn. This
also is a mistake;continuation is even more
likely when the trend is well established. In other words,
do not spend too much of your time
and energy trying to get in at the "beginning" of price
moves. Instead focus your attention and
energy on trading those markets already in clearly
established trends. Of course, any time a trend
shows solid signs of being on the verge of changing
direction, there is nothing wrong with trading
for this possibility. However, the bulk of your trades
should be in markets where a solid trend is
a clear reality, not merely a fuzzy potential.
Over any meaningful period of time, the best (i.e.,
highest probability) trades will be in those
markets with well-established trends. Therefore, it is
only intelligent for a trader to focus energy
and attention first on the markets with the strongest
trends, and then only secondly look to those
markets where the trends may be about to become clear.
Unfortunately, primarily trading markets already in well-
established trends seems to go against
our natural instincts. Maybe it is too boring, too easy.
Many traders spend too much time looking
for the next major trend change, the next big bull or bear
market. This probably comes from a
natural desire to get in at the beginning of moves—
buying near the low and selling near the high.
Attempting to do this must appeal to many "amateur"
traders since most advertisements for
charting software and trading systems seem to highlight
their supposed ability to pick bottoms
and tops. Evidently, this must be what sells best, and if
so, then it is just one more reason why
most individual traders end up losing. They focus on
trying to pick the soon-to-be clear trends,
rather than trading with already well established trends.
Unfortunately, our natural, or human, instincts are one of
the many obstacles to successful trading.
Very often in trading the correct action is not the
instinctive action. Therefore, most successful
traders find it necessary to make a conscious effort to act
correctly, such as forcing themselves to
focus on trading markets already in well established
trends. The unpleasant fact is that in trading
we frequently need to force ourselves to act intelligently,
meaning act in accordance with natural
laws and truths. Sadly, we simply do not tend to act
intelligently naturally. In fact, since the overwhelming
majority of individual traders lose, what feels most
natural must, by definition,
usually be wrong. Obviously, if the easiest, most natural
actions in trading consistently
proved profitable, then most individuals would win
rather than lose; the facts show the
 .opposite to be true
Markets do not trend with equal consistency. Some
markets tend to trend more reliably than others.
The basic rule for reliability of trending is the bigger the
market—"bigger" meaning the more
underlying "units" there are of the item being traded—
the more consistently the market will
trend. In simple physics terms, the bigger the mass the
more likely it will continue moving in its
current direction.
The biggest markets are the currencies. There are
immeasurably more dollars/yen/euros/pounds,
etc. floating around than there are live cattle in feedlots,
beans in silos, silver in storage, and so
on. Therefore, it is not surprising currencies tend to be
among the best trending markets — "best"
meaning highest reliability of a trend continuing once it
is clearly established. Consequently, a
clearly established trend in a currency market is very
likely to continue. Therefore, as a rule, a
trader should almost always trade with the trend in the
currencies (only going against the trend
when and if an excellent case can be made it is on the
verge of turning).
Right behind currencies in terms of trending reliability
are the interest rate markets, with the
shorter the term the greater the reliability of trend (e.g.,
90-day Eurodollars) and the longer the
term the lesser the reliability (e.g., 30-year bonds). At the
other end of the trend reliability spectrum,
not surprisingly, are the live meat markets (live cattle,
live hogs, and feeder cattle). These markets
involve millions of units, while the currencies number in
the multitrillions. This"bigger-the-massthe-more-
reliable-the-trend" rule is also why stock indexes tend to
trend more reliably than
individual stocks.
A secondary rule on trend reliability is the more storable
a commodity (i.e., the longer it can be
held in storage without deteriorating), the better the
reliability of its trend. Therefore, metals
markets tend to trend more reliably than more perishable
commodities, like corn and soybeans.
Then the grain markets (as well as markets like sugar,
cocoa, coffee, cotton) tend to trend more
consistently than the meat markets.
Of course these are generalizations and there will always
be exceptions. Sometimes meats will
trend well and currencies will not, but over time the truth
of this basic trending rule will prevail.
The more long term oriented you are the more you
should emphasize and rely on the trend.
Furthermore, as a general rule, long-term traders should
focus on the currencies and interest rate
markets (the best trending markets). However, any
market in a solid trend is always a viable
candidate for trading, regardless of a trader's trading time
preferences: short term, intermediate
term, or long term

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