NEW TECHNIQUES
Detecting And Determining TrendsTrend-Quality Indicator
by David Sepiashvili
Having trouble detecting trends, or estimating their duration when you do spot one? This indicator comes to the rescue.Trend detection and estimation is one of the most important objectives of technical analysis. One common filtering technique that attempts to eliminate stock market noise and extract important trends is smoothing with the help of moving averages. When using moving averages (MAs) to detect a trend in a security's price, the main difficulty is determining the appropriate averaging period.
To determine the appropriate period can be challenging because different periods have advantages and disadvantages. A shorter averaging period, for instance, may give higher profits but involve high risk, owing to numerous random fluctuations that affect the trend. A longer moving average helps avoid many false reversals by lagging behind the security's current prices, but as a rule, less risk means less profit.
The trend-quality indicator (or Q-indicator) is a trend detection and estimation tool that is based on a two-step filtering technique. It measures cumulative price changes over term-oriented semicycles and relates them to "noise." The approach reveals congestion and trending periods of the price movement and focuses on the most important trends, evaluating their strength in the process. The indicator is presented in a centered oscillator and banded oscillator format.
MOVING AVERAGES AND YOU
Even if you have tuned your moving average (MA) length, a new problem crops up: An optimized system gives good results on historical data but is vulnerable to significant market changes. This can mean disappointing results on new (future) data.
...Continued in the April issue of Technical Analysis of STOCKS & COMMODITIES
Excerpted from an article originally published in the April 2004 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 2004, Technical Analysis, Inc.
Return to April 2004 Contents