Trends: Do they Even Exist?

Jun 18, 2007: 11:53 AM CST

I read a post from StockBee which discusses a recent short exchange between a trader and Ed Seykota, a famous trend-following advocate.

Seykota responds:

“… trends do not exist.

 

Like the past and the future, a trend is merely an idea. There is no such thing in nature.

 

  • Trend is an idea about the overall average historical direction of prices;
  • trend is a convenient way to view history;
  • trends do not indicate the direction of prices in the moment of now, or even exist in the moment of now.

 

Furthermore, The methods you use to define trend (to view history) are entirely up to you, so you get to define trend any way you wish; everyone may have a different idea of “the” trend.”

 

The entire post, as well as other questions of the month can be found at Ed’s Trading Tribe.

 

I agree that each trader can define the trend as he or she wishes, but there are common simple rules that underly the basics of a trend before any complexity is added.

 

Most traders define “Trend” as a series of higher highs and higher lows (vice versa for a downtrend). This implies that price ‘swings’ and experiences successive rallies and corrections, which is not the case in ‘runaway’ or creeper ‘trends.’

 

Some traders define trend as being above a certain moving average. I have read various comments which state “When the price falls below the 50 period moving average, we will be in a downtrend.” I argue with that statement, but it is valid if that is your definition and you make money using it.

 

Some traders define trend specifically with trendlines. This is valid as well if it makes money, and the trend will change when the respective trendline is broken. Some traders use a channel method to define converging or parallel trendlines.

 

Others use price-derivitive indicators such as the Average Directional Index (ADX) or DMI to define trend. As such, when the ADX reaches a predetermined level – usually 30 – then the market is in a trend environment. This works but grossly lags price and not only leaves profits on the table (entering too late) but exit signals aren’t clarified alone (you may exit too early or even too late).

 

So much of trading is trend identification and opportunity location (as well as money management). For the record, (I believe) trends do exist and “Trend” tests out best as any objective source of ‘edge’ in the market, and trend following strategies have often outperformed other strategies over the long term (no strategy is perfect).

 

Give some thought as to how you personally define trend and study how others do it and learn from them – their methods may be just as valid as yours.

 

 

 

 


8 Comments

8 Responses to “Trends: Do they Even Exist?”

  1. ArizonaChartist Says:

    Hi Corey,

    This is why I prefer point and figure charts. On the pnf chart there is only 1 trend line that can be drawn. Solves the ambiguity of multiple trend lines that can be drawn on bar or candle charts. Another benefit of pnf charts is the ease with which one can identify pivot points, ie areas where demand has taken control of supply (bottom of a column of O’s) and vice versa.

    Great post which is why this is one of my favorite blogs.

  2. ArizonaChartist Says:

    “…where demand has taken control of supply (bottom of a column of O’s) and vice versa.”

    Meant to write …”where demand has taken control from supply…”

  3. JMOT Says:

    I believe trend exists. There are so many historical examples of prices following trendlines! But I do believe that it is a self-fulfilling prophecy, because everyone plots the same lines! ^^

  4. Pradeep Bonde Says:

    There is an entire school of thought which says trends do not exist and trend following does not work. Statistically there is no proof that trends have forecasting ability. The major proponent of this theory is the self proclaimed greatest speculator in the world, Victor Niederhoffer.

  5. Corey Says:

    ArizonaChartist: I view Point and Figure Charts at times and they do highlight price expansion/contraction very well and eliminate most of the ‘noise’ from rangebound environments. As a personal observation, they don’t ‘speak’ to me in terms of what I’m comfortable/used to viewing on a chart and I don’t use them as much as I could or should. They are perfectly valid and many traders exclusively use them, and I commend them, but I would have significant trouble if I was forced to use them.

    Thank you so much for your comment and compliments! I appreciate your support.

  6. Corey Says:

    JMOT:

    Precisely! To an extent, some of technical analysis works because it is popularly observed and traders see the same set of data and the charts highlight the same set of information and traders place buy or sell stops at predictable clusters in the market for execution. Sometimes these get faded, but other times price behaves exactly as expected simply because it was expected (or stated differently, traders helped imbalance aggregate supply & demand to make price reverse at one level as opposed to another).

    Trend is no different. This is why the “buy the correction” or “buy the dip” strategies tend to work, or at least work anecdotally. Trends also allow us to structure the data and organize it into a meaningful method.

    Thanks!

  7. Corey Says:

    Pradeep,

    Indeed, many successful professional traders do not utilize trend-following methods and others reject trends altogether. Each trader has his/her underlying fundamental beliefs about what causes price to move and how to take advantage of price movement with reduced risk and greatest reward over a series of time – otherwise they would cease to trade because of a declining account balance.

    I love the market because it is richly academically complex, and there are countless strategies and viewpoints that allow many participants to make money (provided one does not trade without a structured system/discipline/beliefs).

    I read Michael Covel’s book “Trend Following” and various academic and practical market theories were examined, including Niederhoffer’s ideas and I think the book – albeit biased of course – did a sufficient job of presenting the opponents’ views and gave them credit. It is a long read and contains many tangents but it’s a worthwhile book.

    What tends to be the ultimate arbiter in the market is whether or not the academic theory/ideas produce consistent profits. I don’t think any trader has a ‘lock’ on the market because the market is ever changing, and when a majority of traders act a certain way, the market tends to shift away from their profitable strategy into something different, adding a new layer of complexity.

    I enjoy reading your blog and thank you for your comment and I encourage further discussion and sharing of ideas.

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