Tracking Trading Trends

The speed of a rising or declining trend may reveal the longevity of a directional move. When markets move in a methodical fashion trends tend to last longer, thus increasing profit potential. When markets get severely overbought/oversold they frequently go through days, even weeks, of choppy trendless trade. Such periods of consolidation occur when trends near exhaustion and signify that profits should be realized.

To determine if a trend is moving too fast it is imperative to track average range length, commonly known as average true range (ATR). For short-term or swing traders the ATR for days and weeks can be utilized to indicate the health of a trend.

In the chart below each profile is color coded to distinguish days of the week. Note that just before the end of the trend down, gold had a far above average day range (12/7). After a couple of days of sideways trading, a rally ensued. For almost three weeks the ranges were about average, thus never inciting an overbought signal. When the range over a 48-hour period spanned the length of an average week, an overbought signal kicked in and a period of consolidation followed.

It is common to see an above average thrust either up or down prior to a trend reversal. Thus, it would be wise to have ATR in your analytical arsenal when timing and riding trends.

John Seguin
Market Taker Mentoring

Trader Education