How would you test for trendiness?

mark1 · Dec 22, 2005

This is what I use.

TrendStrengthA Indicator from the August 2005 issue of Active Trader Magazine.

Description
Looks how trendy a series is by comparing its price with various SMAs. All SMAs from PeriodStart to PeriodEnd (in steps of the Step parameter) are used for this indicator.
The idea behind: The more SMAs are below (or above) the price the strengther is the trend of the price series. If some SMAs are above and some are below the price no exact trend direction can be defined. The indicator is normalized from -100 to +100, which serves as a value of how many SMAs are above or below the price:

+ 100
Price is above all SMAs, i.e. all SMAs are below the price
> 0 Price is above most SMAs
0
Price is above 50% and below the other 50% SMAs
< 0 Price is below most SMAs
- 100
Price is below all SMAs, i.e. all SMAs are above the price

Usually, values above 60 (below -60) indicate a strong up- (down-) trend whereas values in-between indicate a sideways market. The results depend on the period-range used for the SMAs. The broader the range (e.g. 20-200) the more significance does the indicator have. The longer the indicator remains at +/-100 the stronger the trend.

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Example
This example uses 5 SMAs ranging from 30 to 110 in steps of 20.

So, the indicator can return one of these values:

+100
Price above all 5 SMAs
+ 60
Price above 4 and below 1 SMA
+ 20
Price above 3 and below 2 SMAs
- 20
Price above 2 and below 3 SMAs
- 60
Price above 1 and below 4 SMAs
- 100
Price below all 5 SMAs

As you can see, the indicator value changes in steps of 40. The more SMAs you use (i.e. the smaller the Step parameter) the more continual (smoother) are the resulting values. Your step-value should be small enough to get at least 10 different SMAs for indicative results.

edit: I also use EI by V. Tharp(mentioned in a previous post )and Zscore Indicator

Put ol this stuff together and you have a freaking good indicator of trendiness

Now , the way you can profit with them is your job :mad:

cnms2 · Dec 22, 2005

FYI: Prophet charts have a Ribbon Study that does this with EMAs. You can select first, last and the number of EMAs.

Quote from mark1:

This is what I use.

TrendStrengthA Indicator from the August 2005 issue of Active Trader Magazine.
...
This example uses 5 SMAs ranging from 30 to 110 in steps of 20.

gbos · Dec 22, 2005

Quote from cnms2:

So this means that the smaller the time frame, the steeper the trend (because of the sqrt adjustment).

jerryz,

Question: what would you perceive as "trendier" a steeper slope or a longer slope or a smoother slope?

No, I guess I didn’t explain in detail what I meant. In a normal behaving asset if you calculate volatilities using daily and weekly or monthly data, theory says that it must be connected like this

Volatility longer time frame = Volatility shorter time frame * sqrt(T)

So taking into account that a week has 5 trading days T=5 and you have

Volatility (with weekly data) = Volatility (with daily data) * sqrt(5)

If the first term is bigger than the second then this is an indication of a trending market.
If the second term is bigger than the first then this is an indication of a mean reverting market.

You can program this ratio in an exploration and scan your assets for good possible candidates for trend following.

I don’t claim this is the best way but it is an easy way.

Shazbatz · Dec 22, 2005

Quote from jerryz:

Say you have a set of prices, how would you define and test for trendiness?

The human eye works wonders

jerryz · Dec 22, 2005

jerryz,

Question: what would you perceive as "trendier" a steeper slope or a longer slope or a smoother slope? [/B]

i think it's a matter of degree. obviously, the steeper the better, the longer the better, and the smoother the better.

now you have two markets. how do you measure which market is better according to the above criteria?

jerryz · Dec 22, 2005

Quote from gbos:

No, I guess I didn’t explain in detail what I meant. In a normal behaving asset if you calculate volatilities using daily and weekly or monthly data, theory says that it must be connected like this

Volatility longer time frame = Volatility shorter time frame * sqrt(T)

So taking into account that a week has 5 trading days T=5 and you have

Volatility (with weekly data) = Volatility (with daily data) * sqrt(5)

If the first term is bigger than the second then this is an indication of a trending market.
If the second term is bigger than the first then this is an indication of a mean reverting market.

You can program this ratio in an exploration and scan your assets for good possible candidates for trend following.

I don’t claim this is the best way but it is an easy way.

i have 2 questions about this:

1) what is the rationale, in plain english, that when the weekly volatility is larger than the daily volatility*sqrt(t), you are trending in one particular direction? can it be the case that the daily volatility is pointing to one direction, but the weekly volatility is pointing to the other direction, and the measure doesn't distinguish that?

2) say you are selecting markets to trade and you want to select the "most trendy" market. how would this measure help you do that?

Charlie Dow · Dec 22, 2005

Quote from jerryz:

i have 2 questions about this:

1) what is the rationale, in plain english, that when the weekly volatility is larger than the daily volatility*sqrt(t), you are trending in one particular direction? can it be the case that the daily volatility is pointing to one direction, but the weekly volatility is pointing to the other direction, and the measure doesn't distinguish that?

2) say you are selecting markets to trade and you want to select the "most trendy" market. how would this measure help you do that?

Jerryz, you first must find how to define a trend. If you find that it will work on any chart in any increment for any Market. Take the suggestions everyone gives you here with that goal in mind. Think about your original question . . . define the trend first.

cnms2 · Dec 22, 2005

To compare two markets' trendiness you have to compare their velocity of making money: $/time. But to decide which one to trade you have to look at the other factors that define your trading method, including an estimate of their reward / risk ratio.

Quote from jerryz:

i think it's a matter of degree. obviously, the steeper the better, the longer the better, and the smoother the better.

now you have two markets. how do you measure which market is better according to the above criteria?

cnms2 · Dec 22, 2005

Comparing the two volatilities adjusted with sqrt(time) gives you an indication if the trend is accelerating or slowing: shorter term volatility higher than longer term volatility divided by sqrt(time) indicates that the trend is accelerating.

Quote from jerryz:

i have 2 questions about this:

1) what is the rationale, in plain english, that when the weekly volatility is larger than the daily volatility*sqrt(t), you are trending in one particular direction? can it be the case that the daily volatility is pointing to one direction, but the weekly volatility is pointing to the other direction, and the measure doesn't distinguish that?

2) say you are selecting markets to trade and you want to select the "most trendy" market. how would this measure help you do that?

GRX · Dec 22, 2005

I think Jerryz wants an indicator to PREDICT trendiness.

Good Luck!

How would you test for trendiness?

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