The Power Of Trends

  • July 12, 2000
  • Eddie Kwong

When I saw this chart of Power One
(
PWER |
Quote |
Chart |
News |
PowerRating), my
mind flashed back to a member’s question I had answered for this weekend’s TradingMarkets
Q&As. The member asked what I thought of a trading system which entered
and exited trades on the basis of price bars crossing above and below a
21-day moving average.

Initially, I thought to myself that such an approach, particularly if traded
mechanically, would not work. 

But as I looked at this PWER chart (the member uses a 21-day moving average
and I use a 20-day) and scanned through other charts in preparation for today’s
Chart of the Day, I began to lighten up. Mind you, I don’t believe in mechanical
systems. But I believe there are approaches that, used with discretion and an
applied understanding of the markets, will yield good results. 

My answer to our subscriber was dramatically modified from the negative
knee-jerk response that originally popped into my head.

I would suspect that there’s going to be more to your system than meets the eye other than a moving average crossover if it is going to be successful over the long haul. You’d probably want to place a great deal of emphasis on stock selection using the TradingMarkets stock scanner. You’ll want to generate a list of stocks whose relative strength is higher than 90 and perhaps an ADX of 25 or higher. Then you’ll want to look at each individual chart from this list and find those where the stock seems to be trending in fairly straight trajectory along your 21-day moving average. My opinion is that your results will depend largely on this stock-selection process. The ease with which you find stocks fitting the criteria
also depends the health of the overall market. If we go into a bear market or trading range market, then the candidate list will probably shrink.

In other word–IT DEPENDS! 

Ultimately, any kind of trend-following approach depends on your finding stocks
that are in strong trends and your ability to react quickly and decisively to a
changing market environment.

Until tomorrow,

Eddie