M3 Trend Analysis

.....you already have a trend in place

....a longer term existing trend.

If a stock is in a long term down trend, there is an 80-90% probability that the stock will continue to fall. If the stock then turns and rises for a short period, the probability that this is the start of a new up trend is only 10-20%.

A trend is a movement in price either up, down or sideways.
Trends can take place over weeks, months or years and all trends can be traded profitability.

An uptrend is the result of a rising movement in market prices, which is confirmed by a series of higher peaks and higher troughs. Uptrending markets are referred to as bullish.

A downtrend is caused by a falling movement in market prices, and is confirmed by a series of lower peaks and lower troughs. A downtrending market is referred to as bearish.

Longer than 18 months

Up to 18 months

Less than 3 months

....the greater the strength and momentum of the trend.

A trend of lesser degree will conform to the direction of the next larger trend.

The medium to long term trend and therefore trends are confirmed on the monthly and weekly charts.

At the earliest possible time prior to the short and medium term trend confirming

That price discounts everything - technical analysts analyse the closing price of a stock with the purpose of forming a view of the future.

There are 3 types of market movement - a primary trend, secondary movements or reactions and daily fluctuations

The Primary Trend - is either bullish or bearish and takes place over several years

Secondary Movements or Reactions - take place over many weeks or months and run contrary to the primary trend OR make take the form of a line - an accumulation/distribution pattern which is a price movement over several weeks or longer that is confined to a range of approximately 5%

Breakouts above the line indicate accumulation and forecast higher prices

Breakouts below the line indicate distribution and that lower prices will follow

Daily Fluctuations - these are not significant in determining the primary trend and should be ignored.

The primary trend

1. Renewing Confidence
2. Improved Earnings
3. Rampant Speculation

1. Loss of Hope
2. Decreased Earnings
3. Distressed Selling

....you can avoid whipsaw reactions in your trading which result from technical indicators.

Start with the monthly chart and then narrow it down to the weekly chart.

At the first sign of a new uptrend forming so that we are in a position to profit for the duration of the uptrend.

When the stock forms an equal or higher trough (ie it is NOT lower) than the previous trough and then proceeds to form a higher peak by breaking through the price level of the previous peak - this pattern may take place over several weeks or months.

When the stock forms an equal or lower peak (ie it is NOT higher) than the previous peak and price then proceeds to form a lower trough by breaking through the price level of the previous trough.

1. If the direction of the trend before and after the outside bar is the same, the outside bar is part of the existing trend and does not form a peak or trough.
2. If the bar before is a down bar and the bar after is an up bar, the outside bar creates a trough.
3. If the bar before is an up bar and the bar after is a down bar, the outside bar creates a peak.

Your initial stop would be set as a percentage based stop of 15% of your initial buy price or when price falls $0.01 below a previous swing long - whichever occurs first.

GST helps to dramatically increase probability of success and reduce risk - because they filter out the noise associated with bar charts, they make it easier to recognise trends, support & resistance. They give a quick visual reference as to the direction of a stock and allow you to study longer periods of time more easily.

When there are lower swing highs after a swing low has been broken, therefore for the trend to continue we want to see consecutively lower swing highs and lower swing lows.

When there are higher swing lows after a swing top has been broken, therefore for the trend to continue we want to see consecutively higher swing highs and higher swing lows.

Buy when price rises $0.01 above the previous swing high AFTER a higher swing low.

If an outside bar is present, buy when price rises $0.01 above the high of outside bar following confirmation of an up bar.

An equal swing low is considered as a higher swing low because it is not lower than the previous swing low.

An equal swing high is considered as a lower swing high because it is not higher than the previous swing high.

When price falls $0.01 below the previous swing low AFTER a lower swing high.

If an outside bar is present, when price falls $0.01 below the low of the outside bar following confirmation of a down bar.

That the long term (monthly) trend and the medium term (weekly) trend are both pointing in the direction you want to trade.

That the medium term (weekly) trend and the short term (daily) trend are both pointing in the direction you want to trade.

After the intial percentage based stop loss, then you would exit if price falls $0.01 below the previous swing low OR on a Gann Swing Theory exit.

Your trading plan would specify that you sell on confirmation of Dow theory or when the stock trades 15% below your buy price, whichever presents itself first.

A trend is only confirmed once you have 12 or more bars moving in the direction of the trend on a weekly bar chart.

The bar that forms the peak or trough prior to the new trend forming.

With the lowest low prior to the movement up (i.e. the trough labelled bar 0). It finishes with the highest high prior to the movement down.

With the highest high prior to the movement down (i.e. the peak labelled bar 0). It finishes with the lowest low prior to the movement up.

A movement in price in the opposite direction to the prevailing trend.

Either 1 to 4 OR 7 to 11

All up, down and inside bars

As half an up bar and half a down bar - so half bar will form part of the counter trend and half will form part of the prevailing trend BUT only if the outside bar forms within the counter trend (ie it is not forming a new peak or trough)

When price trades $0.01 above the high of the previous down or outside bar within the counter trend or $0.01 above the high of the previous inside bar (ie bar 1 of new up trend) - essentially we are looking to confirm a higher trough.

When price falls $0.01 below the low of the previous outside or up bar in the counter trend or $0.01 below the low of the preceding inside bar (ie bar 1 of the new down trend) - essentially we are looking to confirm a lower peak.

Exit at an initial stop loss of 15% of the buy price (or tighter for shorter term trading) or a Gann Trend Theory exit whichever occurs first.

Using volume to confirm a counter trend can reassure a trader that the market sentiment is with them and the price of the stock should continue in the direction opposite to the counter trend.

Volume should fall as price falls - if volume continues to rise as price falls in the counter trend, it may indicate that the uptrend is in danger of failing because of the increased selling.

Volume should fall as price rises in the counter trend.

If the outside bar forms either the peak or trough of the move, it will be regarded as 'bar 0' and not part of the count of the countertrend. BUT if the outside bar forms within the counter trend, then it is counted as half an up bar and half a down bar.

You need to wait for the next bar to confirm that the countertrend is over. This happens when the next bar moves $0.01 higher or lower than the inside bar.

1. Bars 0-2 move the price up followed by a counter movement of 2 bars (bars 3-4) in the opposite direction down. Because bar 5 is an up bar, we can confirm that bars 3-4 were a countertrend in the unconfirmed uptrend. The presence of the up bar after the counter trend increases the likelihood that a new uptrend has started given that the strength of the buyers has overpowered the sellers to take the stock back up.

2. Bars 8-11 have moved counter to the overall direction of the previous unconfirmed trend.
To confirm that this is a counter trend, bar 12 would need to be an up bar. If bar 12 was a down bar this would indicated that the potential unconfirmed uptrend was in danger of failing and that the stock was under the influence of a longer term downtrend.

Short term trading

...a higher higher and a higher low than the previous bar.

....a lower high and a lower low than the previous bar.

To make a higher peak you must have movement up in price followed by a movement down in price. This is achieved by having a higher bar or series of successively higher bars that lead to a peak followed by a lower bar or series or successively lower bars that fall away from the peak.

Remember: a lower bar MUST occur after a higher bar to CONFIRM a peak.

To make a lower trough you must have a movement down in price followed by a movement up in price. This is achieved by having a lower bar or a series of successively lowers bars that lead to a trough, followed by a bar or series of higher bars that rise up from the trough.

Remember: a higher bar MUST occur after a lower bar to CONFIRM a trough.

You need price to move either $0.01 above the high or $0.01 below the low of the inside bar to confirm direction and the swing low/high.

This might change the price where you enter or exit a trade.

There is a lot of indecision

2 equal peaks or 2 equal swing highs signal a potential exit - because the 2nd peak is NOT higher. Therefore you need to watch for a break below the previous trough/swing low.

2 equal troughs or 2 equal swing lows can signal a potential entry because the second trough or swing low is NOT lower. This means that you need to watch for price to break above the previous peak or swing high to give the entry signal.

The science comes from the mathematical approach to trading while the art comes from being able to be flexible enough to adapt to the unfolding market.

Learning how to combine rules and tools lets you be more artistic in your approach.

By combining trend lines and Dow Theory or trend lines and swing charts, you can reduce your risk and increase your probability of a winning trade. This is because trend lines indicate a change in momentum of the market whilst Dow and swing charts confirm a change in trend.

They show us when there is a change in the momentum of the market

They show us when there is a change in the direction of the trend.

To actually confirm with a high degree of probability that the trend is actually going to change direction. Using DT or GS to confirm the change of direction can reduce our risk and increase our probability.

To protect profits

Their win/loss ratio and their profit/loss ratio.

Total number of winning trades v total number of losing trades.

To express as a percentage:

winning trades x 100
---------------------
total trades

Profit/Loss
-----------------------
initial investment x 100

The actual execution of the trading plan on a stock or group of stocks over a period of past data to simulate decision making.

Enables you to refine and optimise your trading plan's performance.

To gain confidence in ourselves to implement the trading plan and confidence to trust the trading plan rules. To gain experience and a greater appreciation for how the trading plan works in different environments. This enables us to overcome our emotional reaction to the market when trading live.

1. Lay out a clear unambiguous trading plan with rules for entry, exit and money management on a single piece of paper.

2. Select a number of stocks from different sectors on which to test it.

3. Test the plan over 5-10 years to complete at least 5 paper trades and complete a trading performance spreadsheet to analyse the effectiveness of the trading plan as it relates to each stock.

4. Refine the plan by changing 1 rule at a time to optimise its performance and make it more effective.

5. If successful on 1 stock, retest on the other stocks and keep refining until the win/loss percentage ration is greater than 70%.

1. Win/Loss Percentage
2. Average percentage profit on winning trades
3. Average percentage loss on losing trades
4. Overall percentage profit/loss
5. Average trade length.

70% or better.