If you’re a trend trader your very best gains will come by trading markets and securities that have a tendency to move in strong price trends.
There is then a key objective determining “trendiness” or the “expected tendency strength” of a security. You have to often wait until a price pattern is well underway to view how strong it’s. But imagine if you may recognize BEFOREHAND if a unique protection could have strong cost developments?
Wouldn’t it’s helpful to pre-filter a lot of investments due to their “trend strength” ranking to use in your Trend Trading Style?
I’m planning to demonstrate a simple process using Excel to recognize securities which have a tendency to go in strong price trends.
My goal here is in order to illustrate an useful security selection filter. Excel is very handy for this sort of analysis.
My “Trend Strength” Ranking Indicator
To determine the “expected trend strength” or pure “trendiness” for our 3 securities, we will utilize the Average Directional Movement Index (ADX).
The ADX is made to signal pattern strength over a collection time frame by comparing the comparable open and shut value areas in each price bar averaging these positions in a certain way. For this exam I used the Shine ADX indicator easily available within our 5 Free Technical Indicators in Excel package.
My formula for “trend strength” is easy: Development energy = the final quantity of nights ADX is above 20, separated from the full times tested. ADX was set at 14 periods for this test.
As you can see from these charts, each security had major price trends within the selected test periods.
Trend Strength Test Results
Our three check investments generated substantial value developments during three different cycles. As shown below, our test results suggest that EURO-USD (URO) currency may be expected to show the highest trend energy once ADX rises over 20.
This means that once an amount development starts in EURO-USD there could be an increased tendency to keep trending than either Google stock or Kansas City Corn. This means DOLLAR-USD is a great candidate to get a Trend Trading Design.
Ultimately, our trend strength test would use different investments that trended at the exact same time, but that doesn’t really exist. Therefore I assumed these trends are evaluated pattern vs. development regardless of the days they occurred, and “typical” types for every security.
This test runs to the assumption that there is SOME relationship between a security, its liquidity, economic cycles and market conduct that can repeat in the future. Since it happened before whether similar trending price behavior can actually occur in the future is beyond our power to know.
Remember that we’re just trying to narrow down the populace of securities to industry using a particular type. It’s still as much as the style reasoning to generate appropriate purchase-sell signals.