What is a trend? The question sounds simple enough but if you do any amount of research, you will find that the definitions are varying, sometimes vague and oftentimes contradictory or illogical. The most common answer given to the question, what is a trend is that an up trend consists of higher lows and highs and that a down trend consists of lower highs and lows.
Wikipedia, under its entry for Trend (technical analysis) says the following:
The general direction is certainly broad enough and general enough to cover most aspects of a trend. But I think we can and should do better. The CFTCs definition is no less ambiguous:
There are a number of books that talk about the trend but few of them give a concrete and objective definition beyond those nonspecific descriptions just mentioned. One book that claims to provide a concrete trend definition, and offers mathematical proof as to its exactitude is Trends and Trendlines by the author, who happens to post on this forum from time to time under the user name twoblink. Without turning this into a single book review or a survey of the existing definitions let me state in general terms that the truth of a particular set of premises rests on the underlying truth of the premises. If you start with incorrect initial premises, it is nearly impossible to reach the correct conclusion. But if you start with sound initial premises, you have a much better chance to arrive at the truth.
I shall endeavor to describe in an objective and statistically measurable way how I define the trend or one way you can do it too. It is important to define the terms properly so that a statistically valid trading methodology can be built up from this base. But first Im going to describe why everybody seems to have the wrong idea about trends and lay a foundation for the identification of trends.
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Note: this is not an open discussion on what you think defines trend. Please keep the discussion on the topic of trends presented in the statistical framework here. I placed a 3 voucher minimum so hopefully the more experienced will chime in on the subject after reading the material. Those who can't post feel free to PM me your questions though I can't guarantee a response due to time restrictions and I think this material pretty well explains itself.
It is unfortunate but some will undoubtedly question my motives so let me put it here in the first post. What is my motivation for posting this information? I'm sick and tired of all the misinformation that is perennially passed around under the guise of TA "truth" and accepted without any question by the masses. How many books have regurgitated this misinformation? How can anybody possibly get the right answer if they are basing their inquiry on false assumptions? Nowhere have I seen information regarding how to statistically define a trend. I get nothing other than the good feeling from knowing that I have made my one small attempt to shine some light on the subject of trends. This thread will either become the least popular and most forgotten or the most popular thread on FF. I doubt it will be the latter given the quality I see on these boards every day but I hope that at least one person learns something. Maybe that person will be me.
I've attached an Excel sheet. It will be used throughout the discussion and you won't be able to follow along unless you download it and study it when reading some of the sections.
Wikipedia, under its entry for Trend (technical analysis) says the following:
QuoteDislikedTo a trader who uses technical analysis, the trend in price of a financial security is, intuitively, the general direction of its movement. Loosely, if someone who looked at the price chart would generally say the price is going up, the trend is up, and if someone would generally say the price is moving down, the trend is down. In many cases an observer would find it difficult to decide whether the price was generally going up or going down: in this case the trend may be said to be unclear. When price is oscillating back and forth across a range, the trend is often said to be sideways.
The general direction is certainly broad enough and general enough to cover most aspects of a trend. But I think we can and should do better. The CFTCs definition is no less ambiguous:
QuoteDislikedTrend: The general direction, either upward or downward, in which prices have been moving.
There are a number of books that talk about the trend but few of them give a concrete and objective definition beyond those nonspecific descriptions just mentioned. One book that claims to provide a concrete trend definition, and offers mathematical proof as to its exactitude is Trends and Trendlines by the author, who happens to post on this forum from time to time under the user name twoblink. Without turning this into a single book review or a survey of the existing definitions let me state in general terms that the truth of a particular set of premises rests on the underlying truth of the premises. If you start with incorrect initial premises, it is nearly impossible to reach the correct conclusion. But if you start with sound initial premises, you have a much better chance to arrive at the truth.
I shall endeavor to describe in an objective and statistically measurable way how I define the trend or one way you can do it too. It is important to define the terms properly so that a statistically valid trading methodology can be built up from this base. But first Im going to describe why everybody seems to have the wrong idea about trends and lay a foundation for the identification of trends.
---------------------------
Note: this is not an open discussion on what you think defines trend. Please keep the discussion on the topic of trends presented in the statistical framework here. I placed a 3 voucher minimum so hopefully the more experienced will chime in on the subject after reading the material. Those who can't post feel free to PM me your questions though I can't guarantee a response due to time restrictions and I think this material pretty well explains itself.
It is unfortunate but some will undoubtedly question my motives so let me put it here in the first post. What is my motivation for posting this information? I'm sick and tired of all the misinformation that is perennially passed around under the guise of TA "truth" and accepted without any question by the masses. How many books have regurgitated this misinformation? How can anybody possibly get the right answer if they are basing their inquiry on false assumptions? Nowhere have I seen information regarding how to statistically define a trend. I get nothing other than the good feeling from knowing that I have made my one small attempt to shine some light on the subject of trends. This thread will either become the least popular and most forgotten or the most popular thread on FF. I doubt it will be the latter given the quality I see on these boards every day but I hope that at least one person learns something. Maybe that person will be me.
I've attached an Excel sheet. It will be used throughout the discussion and you won't be able to follow along unless you download it and study it when reading some of the sections.
Attached File(s)
Sample Trend Lines.xls
692 KB
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709 downloads