INDICATORS
Strong Trends = Strong Profits
Trend Intensity Index
by M.H. Pee
How strong is the trend? Find out using this index.
In my previous article I discussed the trend detection index (TDI) and showed its ability to signal the beginning of trends. In this article, I will describe another new indicator, the trend intensity index (TII), which is used to indicate the strength of a current trend in the market. The stronger the current trend, the more likely the market will continue moving in its current direction instead of changing course. It is during a strong trend that you should enter the market and ride along until the TII shows signs of an imminent reversal. When this happens, you should abandon your positions and prepare to place a trade in the opposite direction.
DEFINITION
To calculate a 30-day trend intensity index (TII), follow these steps:
1. Obtain the 60-day simple moving average by adding the closes for the past 60 days and dividing the result by 60.
2. Find the deviation of each of the recent 30 closes from the 60-day moving average. The deviation is up if the close is above the moving average, and down when the close is below the average. Up deviation values are obtained by subtracting the moving average from the close, while down deviations are calculated by subtracting the close from the moving average. The TII allows you to find out what percentage of these deviations is up or down. For a 30-day TII, you should have 30 deviations from the 60-day moving average.
Figure 1: Applying the trend intensity index (TII). Applying the TII to these 15 markets using a 30-day parameter resulted in profitable trades.
...Continued in the June 2002 issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the June 2002 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2002, Technical Analysis, Inc.