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Chapter 2: Statistically Speaking: Trends by the Numbers

  • Michael C. Thomsett
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Practical Trend Analysis
This chapter is in the book Practical Trend Analysis

Abstract

Trend analysis is based on technical attributes of price movement but it can be much more, adding to the value of signals and price attributes. This chapter examines and explains the attributes of trend analysis based on probabilities and statistics. Some primary points in this analysis are: 1. Statistically, no trend continues forever, but some technical traders forget to look for signs of plateau or slowdown in the trend. 2. While a price moves higher, traders need to also track other indicators to determine when stocks are getting too expensive based on price earnings ratio (P/E) among other signals. In this regard, the trend works as an aspect of valuation, which is easily overlooked if a trader’s focus is only on the price of stock. 3. While a price lowers, there is a finite level to the trend; informed investors recognize the point where a stock becomes a bargain and will move in to buy. At this point, the less aware investor is still trend-following and is not looking for the level where the trend is becoming excessive. 4. The trend operates in one of two ways: either it resides within the trading range and may be expected to “bounce” off resistance and support, recognized by strong reversal and confirmation signals or it breaks out and sets up a new higher or lower trading range, meaning the trend moves beyond the previously established range.

Abstract

Trend analysis is based on technical attributes of price movement but it can be much more, adding to the value of signals and price attributes. This chapter examines and explains the attributes of trend analysis based on probabilities and statistics. Some primary points in this analysis are: 1. Statistically, no trend continues forever, but some technical traders forget to look for signs of plateau or slowdown in the trend. 2. While a price moves higher, traders need to also track other indicators to determine when stocks are getting too expensive based on price earnings ratio (P/E) among other signals. In this regard, the trend works as an aspect of valuation, which is easily overlooked if a trader’s focus is only on the price of stock. 3. While a price lowers, there is a finite level to the trend; informed investors recognize the point where a stock becomes a bargain and will move in to buy. At this point, the less aware investor is still trend-following and is not looking for the level where the trend is becoming excessive. 4. The trend operates in one of two ways: either it resides within the trading range and may be expected to “bounce” off resistance and support, recognized by strong reversal and confirmation signals or it breaks out and sets up a new higher or lower trading range, meaning the trend moves beyond the previously established range.

Chapters in this book

  1. Frontmatter i
  2. Contents v
  3. Introduction to the Second Edition: The Basic Problem with Numbers xi
  4. Chapter 1: The Theory of Trends: Dow, EMH, and RMH in Context 1
  5. Chapter 2: Statistically Speaking: Trends by the Numbers 25
  6. Chapter 3: Resistance and Support: A Trend’s Moment of Truth 53
  7. Chapter 4: Trendlines and Channel Lines: The Shape of Things to Come 73
  8. Chapter 5: Reversal Patterns: End of the Trend 95
  9. Chapter 6: Continuation Patterns: A Bend in the Trend 135
  10. Chapter 7: Confirmation Signals: Turning the Odds in Your Favor 163
  11. Chapter 8: Consolidation Patterns; The Sideways Pause 183
  12. Chapter 9: Volume Signals: Tracking Price Trends 201
  13. Chapter 10: Mind the Gap: When Price Jumps Signal Change 223
  14. Chapter 11: Moving Averages: Order in the Change 241
  15. Chapter 12: Momentum Oscillators: Duration and Speed of a Trend 257
  16. Chapter 13: Volatility: Marking Risk within the Trend 271
  17. Chapter 14: Fundamentals: Connecting the Two Sides 285
  18. Chapter 15: Overview: Putting It All Together 305
  19. Bibliography 319
  20. Index 323
https://doi.org/10.1515/9781547401086-002

Chapters in this book

  1. Frontmatter i
  2. Contents v
  3. Introduction to the Second Edition: The Basic Problem with Numbers xi
  4. Chapter 1: The Theory of Trends: Dow, EMH, and RMH in Context 1
  5. Chapter 2: Statistically Speaking: Trends by the Numbers 25
  6. Chapter 3: Resistance and Support: A Trend’s Moment of Truth 53
  7. Chapter 4: Trendlines and Channel Lines: The Shape of Things to Come 73
  8. Chapter 5: Reversal Patterns: End of the Trend 95
  9. Chapter 6: Continuation Patterns: A Bend in the Trend 135
  10. Chapter 7: Confirmation Signals: Turning the Odds in Your Favor 163
  11. Chapter 8: Consolidation Patterns; The Sideways Pause 183
  12. Chapter 9: Volume Signals: Tracking Price Trends 201
  13. Chapter 10: Mind the Gap: When Price Jumps Signal Change 223
  14. Chapter 11: Moving Averages: Order in the Change 241
  15. Chapter 12: Momentum Oscillators: Duration and Speed of a Trend 257
  16. Chapter 13: Volatility: Marking Risk within the Trend 271
  17. Chapter 14: Fundamentals: Connecting the Two Sides 285
  18. Chapter 15: Overview: Putting It All Together 305
  19. Bibliography 319
  20. Index 323
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