Keeping Time Frame Perspective, Part Deux

Richard Howard at Buyside.com has done a great job providing various calculators including the "PDI" which I have, no doubt, made more complicated than it really is by attempting to provide an example. The information below was compiled using the information provided at the Buyside site.

One simple way of staying on the right side of the market is to track a two or three year trend of all trades on a weekly basis. As stated in Part 1, I tend to keep my perspective, and my trades, in line with a two year timeline that involves calculating the results of all possible trade combinations within that time period. With that data, it is usually clear what the direction of the market is. When you see the historical results of trading with and against this two year trend, there is no doubt that trading with the trend will increase your chances of success dramatically, even along many different, shorter time frames.

Take a look at the matrix below. There is no need to see the numbers in each cell; the colors in each cell and the slope of the line in the corresponding chart should be the main focus. The matrix was created in an Excel spreadsheet by simply listing every closing price of the QQQ's in the horizontal top row and the first vertical column. As an example, using a one week period...you would record the gain or loss for

Mon-Tues, Mon-Wed, Mon-Thurs, Mon-Fri
...................Tues-Wed, Tues-Thurs, Tues-Fri
.....................................Wed-Thurs. Wed-Fri
........................................................ Thurs-Fri

In the matrix below, this was done on a weekly basis over a two year period, rather than daily. This contains more than 5,500 trades over that period of time. If the result was a loss, the cell was highlighted in red; if a gain occurred, the cell was highlighted in green. Zooming out to capture the whole view looks like this...



With this information, it is easy to obtain the cumulative percent winners (CPW), and the cumulative percent return (CR). Summing these results provides information for plotting the price direction indicator or "PDI". (See line chart).

The key to using this to determine if the QQQ's, or any individual stock, is trending is to only look at the end of the line chart (on the right). The trend of this part of the line (either up or down) indicates the direction that will yield the best outcome for a trade. Historically, trading against this trend yields poor results. This matrix and corresponding line chart are not predictive but they do give the trader a sort of "You Are Here" perspective that will only increase you probability of success.

This method is simple, and may seem like common sense, but it is not uncommon for traders to fight the trend and not even know they have made a low probability trade. Buyside.com has a few examples with percentages comparing the "buy side" with the "sell side" that will make you a believer.