I've been find better ways to determine trend (I covered ADX and Parabolic SAR already). Jose Cruset on the August 2005 issue of Active Trader Magazine described an indicator that plots the price in relation to its position above a set, or an envelope, of moving averages; if price is above most of the moving averages, then the indicator gives a bullish signal, and conversely for a bearish signal.
An example is below. This takes triple exponential moving averages (google that) and sums up the rest for a set of moving averages from 30 to 300 periods, with a step of 10. Not all of the MA's have been plotted manually:
Notice several interesting things:
1. The bands (orange for short, up to blue for long) align in the direction of the trend.
2. The bands expand during a trend, and contract (and get out of order) during congestion.
3. For the TrendStrengthA indicator, bullish moves start when the line breaks above +50 to 60, and stall near the zero line. The stalling (in this case for the bear) signals a possible reversal. The opposite is true for a bearish move.
Also notice:
In this case, we had a reversal (left box) followed by an attempted rally. Notice something curious though; even though the market is going up, the MA envelopes continue to be inverted. TrendStrengthA is bearish, and ADX is weakening as the market makes higher highs. This signals that a reversal may take place (right box), ultimately taking the market to the lows shown on the first chart.
This approach may supplement my trend system below. TrendStrengthA has to be of magnitude 60 or greater to take a position. ADX is confirmation (and may not be necessary, depending on the effectiveness of this indicator). Enter when TrendStrengthA is > 60 or <-60, and stops are still given by Parabolic SAR (needs tweaking of parameters). Again, the indicator is horrible for anything under 5 minutes.
