Decision Point Trend Model
Trading With the Trend
An investor can greatly improve their chances of success by acting in accordance with the market trend, which is related to the direction of the market—up, down, or sideways. This is due to the fact that most equities and sectors tend to follow the market trend. For instance, more than 90% of stocks may be rising during a robust bull market. This improves your chances of selecting a profitable stock.
Short-term (days to weeks), intermediate-term (weeks to months), and long-term (months to years) periods are the three main emphasis areas of Decision Point Trend Analysis .These definitions are general and can be reduced to more specific time periods (e.g., short-term could be hours to days). The trend in three consecutive timeframes should always be kept in mind, though, as they are all connected, and you should take all three into account when making investing selections. Although the longer term trend is the more significant and dominant, longterm trend alterations may initially be noticed in the shorter-term trends. Put another way, tactical decisions are taken in the near term, but the longer-term trend establishes the strategic attitude.
Long-Term Trend
Long-Term Pattern On a weekly or monthly chart, the long-term trend employs a Moving Average crossover signal. Both a “fast” and a “slow” MA are employed; the fast MA reacts to price changes more quickly than the slow MA because it is computed over fewer periods. Examine the monthly chart, which uses a 6-EMA and a 10-EMA (6-month and 10-month intervals), where each data point represents a month. The trend is bullish when the 6-EMA is above the 10-EMA and bearish when it is below. The 20-year period below is a perfect example of how well this methodology can work. It doesn’t always work this perfectly, but overall it is very effective in correctly identifying the trend Note how the 6-EMA crossed above the 10-EMA at the end of 1994, signaling the beginning of a new long-term bullish trend that lasted until late 2000. The trend then changed to bearish as the 6-EMA crossed down through the 10-EMA, where it remained for over two years during the worst bear market in decades, finally crossing up again in spring 2003. In early 2008, there was another downside crossover, which identified the beginning of another bear market even worse than the one before it. Another upside crossover followed in late 2009. In 2011 there was enough volatility to cause a downside crossover, which was followed quickly by another upside crossover.
Editor’s Note. The moving average combinations chosen are not “magic bullets.” They are effective for DecisionPoint Trend Analysis, but other combinations could also be used similarly.
While the EMA crossovers offer an unambiguous way to determine the trend, there are other nuances that are useful in refining trend assessment. Note that there are times when the price index crosses through the EMAs, as well as times when one or both the EMAs move counter to the trend. Any time one or more of these actions occur, you should consider the trend to be neutral, leaning toward bullish or bearish depending upon how many of these counter-trend conditions exist.
A similar system was created for a weekly chart so that an official reading on the long-term trend may be attained at the conclusion of each week. The monthly chart works well, but we have to wait until the end of the month close before the figures are “official.” The 17-EMA and 43-EMA are utilized on the weekly chart, and the same guidelines apply to the monthly chart as well. Keep in mind that the EMA crosses happen roughly at the same locations, and the two charts hardly change other than the additional information provided by weekly closing prices.
Lastly, a daily chart can also be used to determine the long-term trend; the same process is used, but the 50- and 200-EMAs are used instead. A bear market is indicated if the 50-EMA is below the 200-EMA, while a bull market is indicated if the 50-EMA is above the 200-EMA.
Intermediate-Term Trend
On a daily chart, the 20-EMA and 50-EMA are used to identify the intermediate-term trend. The same guidelines once more apply to EMA crossings, EMA countertrend movement, and the price-EMA relationship. The trend is positive if the 20-EMA is higher than the 50-EMA. The trend is negative if the 20-EMA is below the 50-EMA.
To determine if a bearish crossover in the intermediate term is a sell (sell/short) or neutral (hedge or cash) trend change, the 20/50/200-EMAs can be utilized in conjunction. If the 20-EMA crosses below the 50-EMA and the 50-EMA is BELOW the 200-EMA, the signal is more negative or suggests a sell/short trend shift. “Neutral” is a better option than “sell” if the 20-EMA crosses below the 50-EMA while the 50-EMA is above the 200-EMA. Technically, if the 50-EMA is above the 200-EMA, it means that the longer-term trend is positive or in a bull market.
Short-Term Trend – Bull/Bear Market
The short-term trend is determined using the direction of the daily 20-EMA. If it is moving up, the short-term trend is bullish, and vice versa.
By include the 5-EMA and monitoring 5/20-EMA crossovers, similar to the intermediate-term 20/50-EMA crossovers, this can be advanced. For instance, a bullish short-term trend change occurs when the 5-EMA crosses over the 20-EMA. A neutral trend change occurs when the 5-EMA crosses below the 20-EMA and the 20-EMA crosses above the 50-EMA. A bearish “sell” trend shift occurs if the 5-EMA crosses below the 20-EMA and the 20-EMA is below the 50-EMA. Because the 5/20-EMA crossovers happen often, it is best to follow the 20-EMA’s direction when figuring out the short-term trend.
