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ProRealTime - Trend Is Your Friend ? - TrendDetect, the principle !


You have probably already read on several occasions, different sayings or well known oracles who frequently appear in "after the fact " explanations or analysis on the evolution of prices in financial markets. One of them, "The trend is your friend", highlights the painful paradox...  of being both obvious and complex. Indeed, we are all able to identify the trend, even with a simple moving average, when looking, once again after the fact, at any price chart. So easy to read, and too easy to comment "Here, I was Bullish " ... or "Obviously ... no need to say I was Bearish ....".  One might say Bullsh... if you know what I mean Indécis

Of course, when you look at the current green or red candle, on the far right of your screen ... often confidence and evidence leave room for doubt ... Are we really in a market trend ... right at the beginning ... perfectly in the middle ... or maybe at the heart of a turnaround? Quite interesting question, one can't really skip if one wants to trade.

In the end, I often compare market trend to a girlfriend. It's nice when she is with me, and very painful when she is with others. And as she often changes her mind, it becomes critical to understand who she wants to date tonight !

There are many trend indicators, ready to use on all trading platforms ... including the ones I work with, not to mention them ... ProRealTime and WHS FutureStation. Most probably, you studied them all, those indicators, and maybe sometimes you used them, with or without success. I studied the most of them and discovered a particular affinity for certain. Beyond that, I realized that I found amongst them, an underlying logic, common to most, very simple to use.

The Principle  

The TrendDetect principle is the most simple you have ever read about ! First of all, you choose a center line, a closing price, a moving average or the center line of an indicator.

Then around this center line, or median axis, you calculate two limits, one upper and one lower. Please note that the usefulness of the center line, at this stage of the thinking process is reduced to calculating the two outer limits. So you can simplify the principle by directly setting the upper and lower limits, if you want to. Furthermore, see below, the  median axis can be independent of those limits, and therefore used as a trigger line rather than a center line.

The Trigger

Each time the closing price or the value of the indicator, or your central axis, crosses over, or under, in closing, respectively the outer upper or lower limit, then the opposite one becomes a driving trend line. As far the crossed limit, upper or lower, it disappears from your screen.

In the example above, you can conclude that the trend is bullish.

More specifically, here's an illustration.

From one view point you can clearly see the trend, from another, you can easily identify its origin.

The Rule

Obviously, it is important to identify trend changes. For that, whenever the closing price or the value of the indicator, or your center line, crosses under, in close, the lower limit, current trend guideline, then it disappears and the opposite limit (hidden so far) appears to act as the new trend guideline.
More specifically, here's an illustration.

If the idea, concept, triggers some thoughts, then go ahead with the next reading !

Meanwhile, join us on the TrendDetect forum.

Gregoire Tardy

February 2011

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