Market Trend Quantifier

The market trend quantifier is a simple but effective way of identifying

the market trend, direction, duration, and strength. The quantifier

requires you to input information into a spreadsheet or record

data manually on the market trend quantifier worksheet. Doing this

will alert you to small changes in trend.

The market trend quantifier uses a simple point system of +2,

-2 or 0 For example, if the trend of the market is up and your

intended trade is long in the direction of the market, then the score

is +2 If the trend of the market is down and your intention is to

short into that downward trend, your score will also be +2. The plus

sign is a function of the direction of the trade that makes money. In

this case both trades have a positive +2 score. However, if your

intention is to buy into the market to go long (up) but the current

trend is down, the score would be a -2. A score of 0 is obtained

when the market is in a consolidation.

Refer to Figure 3.1, which shows an example of the market

trend quantifier Here's how to use it: Under Date, write in the current

date. As a practical matter, you should do a market trend quantifier

every two days. In the Market column, place the name of the

market you are following (S&P 500, Nasdaq). In the Total Point Value

column, you will place a numerical score, derived by subtracting

the negative numbers from the positive numbers that make up the

trend score in the Total Point Value column. This total will enable

you to gauge the strength and duration of the markets you are following.

In the Direction column, place an arrow indicating the direction

of the market on that day. In the Action column, indicate a buy,

sell or hold decision. A glance at the market trend quantifier will

enable you to ascertain all of this information on a given day. For

trading strategies 45

Figure 3.1 Market trend quantifier

Date Market Total Point Value Direction A Action

Positive Trend +2 Negative Trend -2 Neutral 0

example, on Tuesday the S&P 500 was in a strong upward trend,

indicating a buy or a hold of current positions with strong correlation

to the market.

The following items make up the market trend quantifier total

point value:

Trendlines +2, -2,0

Exponential moving averages

Money flow (14) +1, -1,0

RSI (14) +1, -1,0

TRIX (12) +1, -1,0

Support and resistance areas

Interest rates +1, -1,0

20, 50, 150 +1, -1,0

+1, -1.0

The point value of trendlines has previously been explained.

The maximum point value for moving averages is +3. To arrive at a

+3 number for the point score would mean that price would have to

be above all three moving averages. You could have a situation in

which you were above the 150- (+1) and 50- (+1) day but below

the 20- (-1) day moving average. In this case your point score would

be +1, derived by subtracting the negative number from the positive

numbers.

The money flow indicator will show movement into and out of

the trading vehicle. A positive money flow reading would give you +1, a negative reading -1, and a neutral reading would be 0. When using

the money flow indicator, use 14 days when asked for the time period.

Relative Strength Index (RSI) examines the internal strength of

a stock, commodity, or market. Tops usually occur around or above

70 and bottoms near or below 30. Improving strength would be +1,

while weakness would have a score of -1. Use 14 days when plotting

the RSI indicator.

TRIX is a trend-following indicator. It displays the rate of

change of a triple exponentially smoothed average of the close. Trix

moves above and below a zero line. It also indicates the slope and

angle of trend. If the trend is positive the score is +1, if negative -1.

The time period for TRIX is 12 days.

Support and resistance lines are used if your trading vehicle is

at or near one or the other. For example, if your trading vehicle is at

support and beginning to move up, this would be +1. Conversely,

if it is beginning to turn down, breaking support, your score would

be -1. If there is no support or resistance reference, then the score

would be 0.

Interest rates play an important role in the growth and strength

of any investment vehicle. You would give +1 to an interest rate

environment that is positive for the growth of the economy and -1

for negative interest rate factors. Focus on present rates and their

relationship to historical lows and highs. Low rates are usually positive

for the stock market, while high rates are traditionally not

favorable for the market. Deflation is a low-interest rate environment

that is negative for the economy and stocks.

All of the different factors in the market trend quantifier are

totaled. If any negative numbers exist they are subtracted from the

positive numbers and the resulting score is the total point value. By

doing a market trend quantifier, you are always aware of the strength,

duration, and direction of the market. Most trading vehicles have a

strong correlation to the market direction and momentum.

The market trend quantifier is a simple but effective way of identifying

the market trend, direction, duration, and strength. The quantifier

requires you to input information into a spreadsheet or record

data manually on the market trend quantifier worksheet. Doing this

will alert you to small changes in trend.

The market trend quantifier uses a simple point system of +2,

-2 or 0 For example, if the trend of the market is up and your

intended trade is long in the direction of the market, then the score

is +2 If the trend of the market is down and your intention is to

short into that downward trend, your score will also be +2. The plus

sign is a function of the direction of the trade that makes money. In

this case both trades have a positive +2 score. However, if your

intention is to buy into the market to go long (up) but the current

trend is down, the score would be a -2. A score of 0 is obtained

when the market is in a consolidation.

Refer to Figure 3.1, which shows an example of the market

trend quantifier Here's how to use it: Under Date, write in the current

date. As a practical matter, you should do a market trend quantifier

every two days. In the Market column, place the name of the

market you are following (S&P 500, Nasdaq). In the Total Point Value

column, you will place a numerical score, derived by subtracting

the negative numbers from the positive numbers that make up the

trend score in the Total Point Value column. This total will enable

you to gauge the strength and duration of the markets you are following.

In the Direction column, place an arrow indicating the direction

of the market on that day. In the Action column, indicate a buy,

sell or hold decision. A glance at the market trend quantifier will

enable you to ascertain all of this information on a given day. For

trading strategies 45

Figure 3.1 Market trend quantifier

Date Market Total Point Value Direction A Action

Positive Trend +2 Negative Trend -2 Neutral 0

example, on Tuesday the S&P 500 was in a strong upward trend,

indicating a buy or a hold of current positions with strong correlation

to the market.

The following items make up the market trend quantifier total

point value:

Trendlines +2, -2,0

Exponential moving averages

Money flow (14) +1, -1,0

RSI (14) +1, -1,0

TRIX (12) +1, -1,0

Support and resistance areas

Interest rates +1, -1,0

20, 50, 150 +1, -1,0

+1, -1.0

The point value of trendlines has previously been explained.

The maximum point value for moving averages is +3. To arrive at a

+3 number for the point score would mean that price would have to

be above all three moving averages. You could have a situation in

which you were above the 150- (+1) and 50- (+1) day but below

the 20- (-1) day moving average. In this case your point score would

be +1, derived by subtracting the negative number from the positive

numbers.

The money flow indicator will show movement into and out of

the trading vehicle. A positive money flow reading would give you +1, a negative reading -1, and a neutral reading would be 0. When using

the money flow indicator, use 14 days when asked for the time period.

Relative Strength Index (RSI) examines the internal strength of

a stock, commodity, or market. Tops usually occur around or above

70 and bottoms near or below 30. Improving strength would be +1,

while weakness would have a score of -1. Use 14 days when plotting

the RSI indicator.

TRIX is a trend-following indicator. It displays the rate of

change of a triple exponentially smoothed average of the close. Trix

moves above and below a zero line. It also indicates the slope and

angle of trend. If the trend is positive the score is +1, if negative -1.

The time period for TRIX is 12 days.

Support and resistance lines are used if your trading vehicle is

at or near one or the other. For example, if your trading vehicle is at

support and beginning to move up, this would be +1. Conversely,

if it is beginning to turn down, breaking support, your score would

be -1. If there is no support or resistance reference, then the score

would be 0.

Interest rates play an important role in the growth and strength

of any investment vehicle. You would give +1 to an interest rate

environment that is positive for the growth of the economy and -1

for negative interest rate factors. Focus on present rates and their

relationship to historical lows and highs. Low rates are usually positive

for the stock market, while high rates are traditionally not

favorable for the market. Deflation is a low-interest rate environment

that is negative for the economy and stocks.

All of the different factors in the market trend quantifier are

totaled. If any negative numbers exist they are subtracted from the

positive numbers and the resulting score is the total point value. By

doing a market trend quantifier, you are always aware of the strength,

duration, and direction of the market. Most trading vehicles have a

strong correlation to the market direction and momentum.