The Trend is Your Friend, Long or Short?

[mdwin01 10]

What has worked for you as far as determining what direction to trade in -- long or short, based on the market and stock past trends?

 

For example, do you only go short with 100% of your trades if the market is below 200 DMA? Or do you look at shorter moving averages on both the market and the stock you are about to trade, and balance out with some short and some long positions? How has your approach worked in choppy markets that are possibly establishing new trends? I'm experimenting with different variables, such as if the stock moving average over last 90 days is trending up and the market day moving average is basically flat, then I'd go long on my position, but don't go long with more than 70% of my positions... Btw, I'm a swing trader in equities only strategy, with up to 10 concurrent positions, and average hold time of 14 days.

[Justaguy 10]

Good question. Which trend to trade has always, since I can remember, been a question.

There are so many ways to determine YOUR direction from moving averages, macd, stochs, pure price action (HHHLLHLL) to gut feel.

 

For me, I like to use where we are in relation to the weeks open for longer term holds to days open for day trading. I find that to be a simple variable. I won't hesitate to use the basic high/low stairstep either. I don't look for overall swings but a simple 1-2-3 reversal pattern.

 

As for chop, there are a few ways to determine it. When the HHHL is happening but other HHHL are contained within (obviously long) the previous HHHL. There is also a series of candles contained within a prior candles high and low range.

 

Or of course...we can keep it simple and if price is from upper left to bottom right...down trend. For me personally, what i listed above are my top picks.

[mdwin01 10]

Thank you, Justaguy.

 

Given that you do determine the trend, how do you balance out your short and long stock positions?

 

>> "As for chop, there are a few ways to determine it. When the HHHL is happening but other HHHL are contained within (obviously long) the previous HHHL"

I'm not sure I know what you are getting at.. Did you mean to say that choppy markets contain conflicting as opposed to matching trends in different time frames?

[SIUYA 11]

put the chart to the maximum setting so you have as many bars as possible on the page. step back and squint your eyes.....does it look like its going up, down, sideways.

I kid you not - its as good as any method to determine your frame of mind.

[mdwin01 10]

SIUYA - I like your caption " .....context is king"..

 

I'm trying to take qualified rules such as "the trend is your friend," quantify them in my backtest dataset, and come up with rules to trade with. So, for example, in my long only backtest, when the context is the market, here are some results:

1) if market trend is ignored my winner rate is 46%

2) if 3 month market trend prior to long position entry is up, then my winner rate is

55%

2) if 1 month market trend prior to long position entry is up, then my winner rate is

57%

4) if both 3 and 1 month market trend prior to long position entry is up, then my winner rate is 71%

 

 

The objective is to figure out how to balance out short and long stock positions. I would rather not be 100% long or 100% short with all my positions at the same time, in order to stay more market neutral, especially in choppy markets.

[mdwin01 10]

There are so many ways to determine YOUR direction from moving averages, macd, stochs, pure price action (HHHLLHLL) to gut feel. QUOTE]

 

Justaguy, I ended up looking at 14 (my average hold time) day simple moving average prior to position entry to determine trend. I'm analyzing trends for previous 90 and 30 days.

[Justaguy 10]

There are so many ways to determine YOUR direction from moving averages, macd, stochs, pure price action (HHHLLHLL) to gut feel. QUOTE]

 

Justaguy, I ended up looking at 14 (my average hold time) day simple moving average prior to position entry to determine trend. I'm analyzing trends for previous 90 and 30 days.

 

 

I think that way is as good as any really. That is what is great about trading is that there are so many ways to accomplish the same goal. You already know and I am probably stating the obvious but MA to determine, depending on length, can get you on the right side too far into the move at times.

 

In answer to your question, I don't balance out. I am a FX trader with a futures dabble. I may have swings in either direction but will day trade the opposite direction as my swings.

[SIUYA 11]

Quantifying a trend......

Always an interesting topic as then you are introducing more parameters and hence more permutations in terms of tests and possibilities.

However, there appears to be a few guidelines and ideas that ideally will help avoid over optimizing and keep the focus

 

1) Use common sense and keep it simple,

match the entries, exits (entering on a breakout, v entering a pulback, does that change the % winners)

2) match the time frames (if you are holding only for 14 days then the long term trends are not such an issue to you)

3) How robust is it; does it work on a portfolio basis or are you only looking at a few instruments and working to optimise those? eg; shorts in equity indeices dont necessarily work that well over the long run.

4) what are the other parameters that are important to look at in such a back test, eg; the size of the drawdowns. length of time of a drawdown

5) do many of the filters for a trend achieve similar results - if so, then maybe it does not matter so much what the filter is. Maybe a completely different type of filter is needed to radically improve a system.

 

(As a simple and interesting exercise - take a data set of prices. work out the percentages of up days v down days, Then add a filter eg; MA50 day. then work out the percentages of up days v down days, above the MA (uptrend), below the MA (downtrend). the results might surprise you - magnitude of moves is often and important element to look at)