Measuring Trend and Trendiness II

Brett N. Steenbarger, Ph.D.

www.brettsteenbarger.com
Below are two charts that look back on the past week, using two different methods for
assessing the markets tendency to trend:

While there are timing differences between the Trendiness Measure (described in last
weeks article) and the Power Measure, they basically tell the same story over the course
of the week. The market moved higher with an improving trend, then moderated its
ascent (with declining positive trend), then pushed lower with the trend measures dipping
into negative territory. By Friday, the trend measures lifted off their lows, remaining in
neutral territory, giving indication that we were not following through to the downside.
The market can be described as being in one of five modes at any given time: bullish
trend with expanding positive trendiness; bullish trend with waning trendiness; neutral
trend (rangebound); bearish trend with expanding negative trendiness; bearish trend with
waning trendiness. When there is a trend and trendiness is expanding in the direction of
the trend, a buy and hold strategy is warranted. When trendiness is waning, but there is
still a directional trending bias, a strategy of entering on countertrend moves is indicated.
When the trend is neutral, the strategy is to fade extremes (i.e., movements away from a
volume-weighted average price).
This analysis suggests that any attempt to have a single trading styletrend-following,
countertrend, etc.is misguided. The market cycles through the five modes at irregular
intervals, rendering any fixed strategy obsolete. Fortunately, trending and non-trending
modes do persist for some time, allowing nimble traders to benefit from an accurate
assessment of the markets trading mode.
Understanding what the market is doing is every bit as important as predicting what it
might do.

Ninety percent of all the trading problems I observe are due to two factors: overtrading
(assuming opportunity where there is none) and failure to accurately identify what the
market is doing. Both are liabilities of subjective trading styles. If you know that a
sizable proportion of market participants operate with such subjective biases, it should be
possible to define trading systems/methods that exploit such tendencies.

Brett N. Steenbarger, Ph.D. is Director of Trader Development for Kingstree

Trading, LLC in Chicago and Clinical Associate Professor of Psychiatry and Behavioral
Sciences at SUNY Upstate Medical University in Syracuse, NY. He is also an active
trader and writes occasional feature articles on market psychology for a variety of
publications. The author of The Psychology of Trading (Wiley; January, 2003), Dr.
Steenbarger has published over 50 peer-reviewed articles and book chapters on shortterm approaches to behavioral change. His new, co-edited book The Art and Science of
Brief Therapy is a core curricular text in psychiatry training programs. Many of Dr.
Steenbargers articles and trading strategies are archived on his website,
www.brettsteenbarger.com