I few months back, I described a a trading model that is unbelievably effective and robust largely because it demands the integration of longer term trends with short-term price action. The vast majority of traders operate almost exclusively in high frequency timeframes (daily, intraday, etc) which I call âlocal price action.â But, itâs really the low frequency timeframes (quarterly, monthly, weekly) which drives trends and controls the resolution of local price action and I'll illustrate the effectiveness of correlating a wider rnage of timeframes into the analysis. I'm going to explain this process in more detail than previously in a series of posts in three main parts: Pt. 1: Anchoring Trade Analysis in A Primary Trend Model Pt. 2: Ideal trade Location & Variant Perception Pt. 3: Reversals & the Order Flow Bias Some of what I've posted before was objectionable to some and controversial to others, so if for some odd reason, what I write about or how I write it is irritating then read no more. I don't explain everything explicitly, but the process is laid out and you can use a lot of the tools you already have confidence in to fill in the blanks. If you want a more complete version (this is edited) of this process with follow-up then go to my blog http://www.street-noise.net/articles/ There is a gray box on the right side where you can drop me an email and I'll send you more complete PDF versions along with updated analysis of current markets and current conditions. ==== Pt. 1: Anchoring Trade Analysis in A Primary Trend Model As mentioned, high frequency timeframes (daily & intraday) are frequently noisy, yet that's where most traders focus their time and effort. The key point is that the low frequency timeframes (quarterly, monthly & weekly) which drives trends and controls how various market structures (price swings and price patterns) are going to resolve. In this first Part 1, I'm going to walk through some charts and demonstrate how primary trends control the resolution of structures that develop in lower timeframes, but first we have to define a controlling trend. The idea of a primary trend is to isolate a higher timeframe where the bids or offers in that timeframe offset or dominate what is happening in lower timframes. In this way a primary trend, is a controlling timeframe. Rising quarterly equilibrium price levels drives what I call primary bull markets in most markets. At the end of each quarter, I run a proprietary calculation to determine a historical quarterly equilibrium price level. In the monthly Gold chart (Primary_B) the solid blue line at X is historical quarterly equilibrium. I also run new estimates every month for the new quarter (see chart above, solid light line at Y). When the solid blue line is clearly rising, quarterly equilibrium price levels are rising and the primary trend is up. In the lower timeframes (weekly and daily, etc) the major reactions back to quarterly equilibrium have been nothing more than strategic opportunities to reduce short inventory and increase longs. At the recent lows, Gold moved back to quarterly equilibrium as it tested the light blue line, which is the where I expect quarterly equilibrium to be in 3rd Quarter 2006, giving me enough confidence to accumulate gold and gold stocks a couple weeks ago near the low. Likewise, when the solid blue line is clearly in decline (see the 10-Yr Notes chart, Primary_C) quarterly equilibrium price levels are declining and the primary trend is down. Notice the primary trend reversed in the 1st Quarter of 2006 and the rally in the 1st Quarter was nothing more than a strategic opportunity to reduce long inventory and increase short inventory. In the monthly Dollar chart (Primary_D) the solid blue line at X is historical quarterly equilibrium. Notice the primary trend turned down in 2nd Quarter 2002 and exerts a controlling influence as every rally attempt failed for 2 years. After a brief primary bull move up, the primary trend turned just down again in the current 3rd Quarter 2006. Finally, look at the S&P 500 Stock Index monthly (see Primary_e). It entered a primary trend bear market in the 1st Quarter of 2001 and once again every major rally failed for two years. The S&P then reversed into a primary trend bull market in the 3rd Quarter of 2003. As of June 2006, the recent decline is a correction, not a bear market, because quarterly equilibrium is still rising. At the recent lows, the SPY had moved back to quarterly equilibrium giving me enough confidence to increase long inventory in certain individual stocks a couple weeks ago very close to the extreme low. Reviewing these charts it becomes self-evident how important it is to anchor trade analysis in some type of higher timeframe trend. To recap, seeing trade location, where price is currently positioned relative to a primary (controlling) trend, anchors the analysis by placing a trade in a context where you can see if an asymmetry exists betwen risk and reward and why a price structure in a lower timefame should ultimately resolve in a reversal back with the primary trend. Of course, most traders need a finer degree of resolution than monthly bars offer, in order to convert a general strategy into viable tactics. In Part 2, to follow which I'll post as a new thread, we'll drill down into weekly bars and talk about ideal trade location in a more specific way. I publish this type of analysis (in more detail) for a range of important current markets as PDFs. If you want to follow more current examples and learn more about the tactics simply go to my blog http://www.street-noise.net/articles/ There is a gray box on the right side where you can drop me an email address. It's currently FREE to all.
The second installment, Part 2a, has been posted to the Trading forums section under the title: "What Works in Trading & Why: Pt. 2A: Ideal trade Location & Variant Perception"