The Difference Between Trend and Momentum

R

Rahula

Ed Seykota got me thinking about trend and momentum and not mixing up the two. He says all trends exist only in hindsight. He says that a trend is the 1st derivative of price and adds a lag onto price data. And Momentum is the 2nd derivative of price and adds an additional lag onto price data. Therefore, his reasoning goes why add an additional lag onto your trading by trading momentum - instead of simply sticking to trading the trend. He then adds you can goes further and add even another lag such as the momentum of the momentum - the 3rd derivative of price, and so on.

Some of the common trend indicators people use are: trendlines, moving averages, N-Bar Breakouts, and HL,HH/LH,LL patterns. Of these three I think N-Bar Breakouts and HL,HH/LH,LL are the true (non momentum) trend indicators. With trendlines and moving averages, one can confuse with trend trading when in fact they may be momemtum trading.

For example if you're using trendlines, aren't you really trading momentum rather than trend? The equation of a line is f(x) = mx + b where m is the slope (momentum, or rate of change). So if you hold a "trend" trade using a trend line and hold until the trendline breaks then aren't you really just trading momentum - because a trendline break is actually a momentum break (price can continue to go up on slower momentum).

Same thing with Moving averages. If you look at a 200 day MA on S&P from 2003 to now for example. If price moves below the 200 day MA it doesn't mean the 200 day trend is now down it means that the momentum of the 200 MA has broken and is now decreasing. The 200 day trend may continue up with decreased momentum.

The mixing up trend and momentum gets eliminated by using an N Breakout system like a 200 day breakout. Momentum isn't a variable at all in such a system.

HL,HH/LH,LL patterns are also free of momentum considerations.

So my question is how to trend trade using TLs and MAs without getting it mixed up with momentum trading? Is it even possible? Since momentum trading is inherently trend trading, isn't using TLs and MAs simply trend trading with tighter trailing stops so that you get out as soon as momentum breaks/weakens even though the trend itself does not change/reverse.
 
mo is shorter lived than trend lines "which i hate" and averages "which i kinda like to look"

mo is usually short and blippy leaving the trend to flail along.

got it?
 
Have your programmer code up some of your favorite systems, including the ones you're trading today, as black boxes. Tell her to give them anonymous names like "system1, system2, system3" and so forth. Now, you run them and look at the trades they generate. When you analyse each system, ask: does this system enter when it's supposed to, ACCORDING TO YOU? Does it exit when it's supposed to?

Pick the black box that generates trades YOU LIKE BEST. And then don't concern yourself with names and labels like Momentum and Acceleration and Inertia and Trend and Support and Resistance and Velocity and Derivative and Lag. Study the trades and pick the system whose trades are the most righteous ACCORDING TO YOU. Who cares what's inside the black box you picked, and who cares what's inside the black boxes you didn't pick? And for heaven's sake, who cares what names some guy calls the insides of the black box? As long as it produces the trades you like best, embrace it. Then ignore the words, the labels.
 
Quote from MGJ:

Have your programmer code up some of your favorite systems, including the ones you're trading today, as black boxes. Tell her to give them anonymous names like "system1, system2, system3" and so forth. Now, you run them and look at the trades they generate. When you analyse each system, ask: does this system enter when it's supposed to, ACCORDING TO YOU? Does it exit when it's supposed to?

Pick the black box that generates trades YOU LIKE BEST. And then don't concern yourself with names and labels like Momentum and Acceleration and Inertia and Trend and Support and Resistance and Velocity and Derivative and Lag. Study the trades and pick the system whose trades are the most righteous ACCORDING TO YOU. Who cares what's inside the black box you picked, and who cares what's inside the black boxes you didn't pick? And for heaven's sake, who cares what names some guy calls the insides of the black box? As long as it produces the trades you like best, embrace it. Then ignore the words, the labels.
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That's a good idea. I'm no system trader, but that's a good idea.
 
Rahula

Measure trend and momentum by their time rate of change (increasing or decreasing) and cross the two using the four possible cases. Compare to the price action by shading the cases color by color.

This will give you a continuous evaluation of price action and you will not have all of the problems Mark Brown tells us he has.

Increasenow, glance at the results and find that all the bases you wanted covered are also taken care of.

Ed didn't get around to this; not many people have.
 
Quote from Rahula:

So my question is how to trend trade using TLs and MAs without getting it mixed up with momentum trading? Is it even possible? Since momentum trading is inherently trend trading, isn't using TLs and MAs simply trend trading with tighter trailing stops so that you get out as soon as momentum breaks/weakens even though the trend itself does not change/reverse.
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Yes, I agree with your definition. I think the only thing the term trend would denote is perhaps a longer timeframe.

Momentum/Trend= essentially the same thing, depending on your perspective.

A short term trader may consider a price move as trend, where a longer term trader may consider that same move as merely short term momentum. At least by my definition of trend/momentum trading. However, at the end of the day, they are about the same to me.
 
Quote from Rahula:

HL,HH/LH,LL patterns are also free of momentum considerations
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okay...say a bar has a HH etc....how do you enter if no other indicator...the next bar could easily be a LL...please clarify your approach...
 
Quote from Rahula:

Ed Seykota got me thinking about trend and momentum and not mixing up the two. He says all trends exist only in hindsight. He says that a trend is the 1st derivative of price and adds a lag onto price data. And Momentum is the 2nd derivative of price and adds an additional lag onto price data. Therefore, his reasoning goes why add an additional lag onto your trading by trading momentum - instead of simply sticking to trading the trend. He then adds you can goes further and add even another lag such as the momentum of the momentum - the 3rd derivative of price, and so on.

Some of the common trend indicators people use are: trendlines, moving averages, N-Bar Breakouts, and HL,HH/LH,LL patterns. Of these three I think N-Bar Breakouts and HL,HH/LH,LL are the true (non momentum) trend indicators. With trendlines and moving averages, one can confuse with trend trading when in fact they may be momemtum trading.

For example if you're using trendlines, aren't you really trading momentum rather than trend? The equation of a line is f(x) = mx + b where m is the slope (momentum, or rate of change). So if you hold a "trend" trade using a trend line and hold until the trendline breaks then aren't you really just trading momentum - because a trendline break is actually a momentum break (price can continue to go up on slower momentum).

Same thing with Moving averages. If you look at a 200 day MA on S&P from 2003 to now for example. If price moves below the 200 day MA it doesn't mean the 200 day trend is now down it means that the momentum of the 200 MA has broken and is now decreasing. The 200 day trend may continue up with decreased momentum.

The mixing up trend and momentum gets eliminated by using an N Breakout system like a 200 day breakout. Momentum isn't a variable at all in such a system.

HL,HH/LH,LL patterns are also free of momentum considerations.

So my question is how to trend trade using TLs and MAs without getting it mixed up with momentum trading? Is it even possible? Since momentum trading is inherently trend trading, isn't using TLs and MAs simply trend trading with tighter trailing stops so that you get out as soon as momentum breaks/weakens even though the trend itself does not change/reverse.
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That is actually very interesting.Could you explain the situation or your conclusion in layman's terms?

I don't know much about moving averages in practice (only theoretically), how I can relate to the question is:

- Trend Following - Richard Dennis & the Turtles (I read the original manual PDF long ago but it just left me clueless and with questions)
- Momentum Trading - Nicolas Darvas

Which to choose? Maybe it depends on your (Enneagram) personality type? www.enneagraminstitute.com/dis_sample_36.asp
 
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