21
Aug

Timing Isn't Everything, But It Helps or Being Trendy - $SPY

trendy

I often talk about trading with the overall trend. I had run across this concept several times in my trading career. First when I read GC Seldon's book, Psychology of The Stock Market in which he states, "Endeavor to catch the trend of sentiment. Even if this should be temporarily against fundamental conditions, it is nevertheless unprofitable to oppose it."

 

Around the same time, I was fortunate to work with a wonderful trader who called himself SPYderCrusher. SC suggested that I only suffered significant losses when I was fighting the trend. He had developed a software program using Worden charts that could time the market. His work was insightful and I started following his timer with my trades. The idea was to only go long when the timer was green and to stay on the sidelines (or go short) when the timer was red.

It worked. My trading improved significantly and the idea of avoiding trading against the overall trend stuck with me. Quite simply, longs don't work as well in a distributive environment and shorts don't work as well in an accumulative one. 

Unfortunately for the trading community, SC stopped sharing his work with the public.  And while I lack software programming skills, it did occur to me that I could analyze the market in the same way that I analyze individual stocks.  During the time that I followed SC's work, I also analyzed the indices using candlestick signals and other technical indicators and patterns, and I found that my own analysis came to the same basic conclusions that his did. Thus my personal Market Timer was born. 

As I built the building blocks that have become my strategy, sticking with the trend became an integral part of the means to an end; the sum of which is always keeping the odds in my favor.  

Over the years, I incorporated the idea of Dow theory into my timer which suggests that there is a primary trend with more minor trends beneath it. As such, I don't tend to go short when my daily market timer turns red if the longer term trend is still green, but rather stay on the sidelines. Although I may at that time already have longs in my swing trading portfolio when that turn arises and I may in this case combine a few shorts with my longs to keep a more neutral bias or I may just let each position play out but discontinue adding new longs in the more distributive environment until my timer turns green again. 

The title of this piece reiterates that this is but one piece to the puzzle. 

Update: 

It has been brought to my attention that this post may have left some traders more confused about my timer. To clarify, I analyze the market the same way I do stocks...using candlestick buy and sell signals as well as the moving averages and technical patterns to determine if the market is bullish or bearish on a daily time frame.
Since we are talking about swing trading on a daily time frame, I go long or not depending on the trend in the indices on a daily time frame.
But I also keep in mind the notion that comes from Dow Theory that the overall trend, the longer term trend may not be what the shorter term or daily trend is because secondary trends zig and zag within a trend. Price doesn't move in a straight line. 
For example, here are two charts that show both a shorter term trend going in the opposite direction of a longer term trend. 
downtrend uptrend

Comments are welcomed and encouraged. 

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