Range and Trend, from Craig Cuyler

September 18, 2006 |

As Larry remarks, most markets are very different from each other and to take this further so are most time periods. One of the biggest mistakes traders make is that they assume markets are homogenous or they assume that what works well in one market should work well in another.

What works well for one day or for one hour can be completely different for another day or hour in the same market. Daily range can also be deceptive. To assume that a market that has a high daily range is a market that trends is also false. Markets with low volatility often trend better than ones with high volatility. Daily range and its implications also work very differently in certain markets like currencies which trade 24 hours a day. How significant is the range in Asian time of Dollar/Euro? Many commodities like gold for example also trade virtually 24hrs a day but the futures are only open for a few hours. Concepts like average true range take the day open to previous day high and low, and average these, so some specs prefer this measure.

What is a trend exactly and how long must it last to be labeled a trend? A trend is defined as "a general direction" of something. More specifically it is defined by market technicians as the general direction of the market. In the classic book Technical Analysis of the Financial Markets by John J. Murphy he states that a trend has three directions. Herein lies the first contradiction. The three directions are up, down and sideways according to the well respected Mr. Murphy and he states that most people think of trends as either up or down, however the markets spend at least a third of their time in a sideways trend. If a market is moving sideways is it then a trend? How is the word "sideways" compatible with the word "trend"? Most technical analysis uses tools that try and identify a trend, try to identify the breakout of a trend or try and identify the end of a trend. Even if there was a clear cut rule based definition of a trend (a solid testable hypothesis) and one could somehow magically know when a given market w as trending, there still would not be any guarantee that you would make money. This is because a trader needs more information that just the direction of a market even though the choices are really up or down. A lot of the material on the spec list deals with these facts about markets. Speculating involves many aspects like leverage, time frame, risk vs. reward, timing, short term events, stop losses and many other short term factors that could wipe out ones funds very quickly if not taken into account.

All these factors need cognizance if one is to successfully trade a trend, because as Mr. Murphy has stated they (trends) are not always present. It is precisely the times when they are not that trend followers lose severely because it is at these times that inevitably their positions will be the largest.





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