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Technical Traders

Trend following is a form of technical analysis. However, it is not predictive technical analysis, but rather it is reactive technical analysis. This is key to understand.

Technical analysis must not be predictive or you will lose. Trend following does not involve the use of RSI, Gann, Elliott Wave etc. These types of indicators all purport to predict markets. However, you can’t predict a market, you can only react to it. Trading as a trend follower, for example, is entirely reactive with no prediction. Trend following is comprised of both money management and technical indicators.

Key insight on indicators and curve fitting of systems.

Misguided insight from Fidelity.

Indicators Are Not Enough

People get caught up thinking that indicators are “it”. They think indicators are all they need. First and foremost you need a trading system that answers the 5 questions presented in Chapter 10 of the book Trend Following. The list below may have some indicators that are useful in the context of answering the 5 questions that make up a complete trading system, but used alone these indicators are useless.

More on indicators.

More on why entry/exit is not enough.

Full Name Description
+100/-100 Crossover This is a classic interpretation of CCI. Crossings from above +100 to the downside constitute a short, and crossings from below -100 to the upside constitute a long. The period used for CCI and crossover levels can be optimized.
Commodity Channel Index Divergence Draws CCI indicator, then the Divergence indicator pivot point is used to isolate.
Commodity Channel Index Fibonnaci Peaks Plot 8, 13, and 21- Period oscillators on top of one another. Confirms the existence of peaks (or valleys) conforming to cycles in all three time frames.
Commodity Channel Index Peaks Indicator that measures overbought vs. oversold levels by virtue of today’s price distance from the statistical mean price.
Chaikin Level Divergence Draw the Chaikin Oscillator. The divergence pivot point method is used to identify divergence from a prior pivot point of the oscillator.
Chaikin Level Peaks The Chaikin Oscillator rises when prices advance on higher volume, and goes negative on price declines on high volume. A reversal in the indicator indicates that the current trend in accumulation or distribution could be reversing.
Candle Pattern: Belt Hold Pattern formed by a range which extends in the direction of the close. A Bearish Belt Hold exists when the High equals the Open and the Low is below the close. Similarly for the Bullish Belt Hold.
Candle Pattern: Counter Attack Occurs when the market reverses direction violently to arrive at the same valuation as a prior period.
Candle Pattern: Doji Star Occurs when the closing price equals the open.
Candle Pattern: Engulfing Line Occurs when today’s range encloses or engulfs the prior day?s range, thereby indicating great market strength in the direction of today?s close.
Candle Pattern: Harami Just the opposite of an engulfing line; yesterday’s body engulfs today’s, with opposite color for the two.
Candle Pattern: Hammer/Hanging Man The Hammer pattern is formed by a short body at the top of a long tail. They indicate indecision in the direction of the trend. A solid hammer which occurs at the end of an uptrend is called a Hanging Man. This type of Hammer indicates the market?s propensity to sell off sharply.
Candle Pattern: Inverted Hammer. Just the opposite of Hammers; a small body occurs at the bottom of a long tail.
Candle Pattern: Morning/Evening Star A Morning Star is formed when a small body is located between two other bodies so that it appears below (or above) the other two. An Evening Star generates a sell signal when a small body is located above two surrounding candles.
Candle Pattern: Piercing Line/Dark Cloud Occurs when today’s candle pierces the range of the prior day, in the opposite direction. The Bearish case is also called a Dark Cloud Cover.
+DI/-DI Crossover Directional Movement comprises ADX, and has two components, +DI to measure movement to the upside, and -DI, for the opposite. When these two lines cross each other, the market is typically moving from one trend direction to the other. The period for DMI is optimizable.
Kirshenbaum Band Crossover Measures market volatility using standard error of linear regression lines of the close. The effect is that they measure the volatility around the current trend.
MACD Divergence Looks for divergence between the MACD line and price. This divergence is measured using the pivot point algorithm.
MACD Crossover The MACD is constructed by plotting the difference between a 12-period exponential moving average and a 26-period moving average. A third moving average (the trigger line) generates trading signals when the MACD line crosses the trigger , in the direction of MACD.
Money Flow RSI Breakout This indicator basically measures the amount of money flowing in or out of a particular stock. When Money Flow moves through zero, it is a sign that a given security is being accumulated or distributed. A separate moving average is provided to smooth the swings. The period used for MFR and the moving average period are both optimizable.
Money Flow RSI Divergence Divergence, applied to Money Flow RSI. The system trades when MFR diverges from price.
Momentum Peaks Momentum measures the amount a security’s price has changed over the past p periods. This system uses the peak signal method.
Two Moving Average Crossovers The faster or shorter-term moving average will rise above a longer-term one, thus giving rise to a system that is in the market on the side of the faster average.
Price Rate of Change Crossover Expresses the relative price movement as a percentage.
ROC +6/-6 Crossover A classic +6%/-6% crossover system, which trades when the oscillator moves through +6% to the downside (short) and -6% to the upside (long). The period for ROC and the percentage level can both be optimized.
RSI +70/+30 Crossover The Relative Strength oscillator (RSI), as defined by Welles Wilder, using a classic crossover interpretation. The system trades when RSI crosses through +30 to the upside (long) and +70 to the downside (short). The levels and periods for the RSI calculation can be optimized.
Relative Strength Index Divergence Divergence trading signals occur when an indicator is sloping away, or diverging from the price trend.
Relative Strength Index Peaks Based on the notion of comparing up days with down days, according to the theory that overbought levels follow a disproportionate number of periods in which the market advanced, whereas oversold levels generally occur after the market has declined for a significant number of periods.
STO +80/+20 Crossover This is the classic Stochastics system which was included in our original systems for MetaStock. The system trades when Stochastics crosses +80 to the downside (short) and +20 to the upside (long). All parameters, including levels, %K and %D periods can be optimized.
Stochastic Divergence The stochastics plot is drawn, and then divergence is measured using the indicator pivot point algorithm.
STO Classic %D Moving Average Ts when the %D line crosses the %K line above given level (short) or below a given level long). Another classic interpretation of stochastics.
Stochastic Peaks Stochastics measures the relative position of today?s close to the range of price action over the past p periods, and are based on the observation that price will typically extend to the end of a range before reversing.
TRIX Divergence Divergence on the TRIX (Triple Exponential Moving Average) plot using the pivot point algorithm.
TRIX Momentum Fibonnaci Peaks The 8-period, 13-period, 21-period TRIX momentum oscillators are used to arrive at the composite indicator.
TRIX Momentum Peaks Yesterday?s value of TRIX is subtracted from today?s value to obtain a momentum curve which gives early signals.
Volume Accumulation Percent Breakout Measures relative change in accumulation and distribution to detect places where the market is changing its perception about a security by taking a more active role in buying and selling it, relative to the immediate preceding time period.
Volume Accumulation Percent Band Crossover A move above the threshold occurs at the same w/ time as price crosses a trading band.
Volume Accumulation Percent Divergence The volume accumulation percent plot is drawn, and then divergence is measured using the indicator pivot point algorithm.
Volume Climax System that attempts to identify situations in which prices reverse in the opposite direction as volume declines.
WIL %R -20/-80 William?s %R oscillator, with classic crossover Crossover. The system trades (long) when William?s %R crosses -80 to the upside, and short when the oscillator crosses -20 to the downside. The values for period and crossover levels are both optimizable in this system.
Williams %R Divergence Williams %R ( an inverted, nonsmoothed Stochastic oscillator) plot is drawn and then divergence is measured using the pivot point algorithm.
Williams %R Peaks Turning points of the Williams %R are determined.

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