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TREND ANALYSIS, DISPLACED MOVING AVERAGES
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When I get into an aircraft, I like to see some gray hair on the Captain. It gives me confidence and puts a smile on my face as I settle down to my first drink. My assumption is that he's been around a while and likely to have seen some spooky times. It's no different with trading. The egotistical traders among us might hide the Grecian Formula®, but the experience is still there. We juggle dynamite when we trade futures. While a trader could certainly use the concepts taught in this book to enhance his magnesium-like glow, the purpose of this book is rather to allow a trader to profitably survive. Longevity in this arena tells you who's made the grade.

By scrupulously identifying the CONTEXT of your trade, you know up front your risk/reward criteria. You know up front whether or not you wish to participate in a given trade or wait for the next opportunity which is always just around the corner. Remember...

Loss of opportunity is preferable to loss of capital!

Ifyou haven't fully understood the term "Trend" as defined in CHAPTER 2, please restudy that section. Ifyou are interested in how I came to use Displaced Moving Averages, you may refer to CHAPTER 1.

GENERAL DISCUSSION:

There are many types and varieties of Trend delineation techniques. Trend lines and Moving Averages are among the most commonly used. There are also Displaced Moving Averages, Moving Average Bands, Deviation Bands, MA CD, RSI, Stochastics and so on. There are almost as many ways of defining "Trend" as there are traders. One of my better students (Ed Moore) uses Fibonacci techniques to define "Trend." In inexperienced hands this could be a way to turn a great Leading Indicator into a poor Lagging Indicator. In Ed Moore's case, there's enough experience to draw from to make this transition useful. Another old time pro I know simply looks at price either above or below the open, to establish an up or down Trend respectively. While I like the simplicity of this technique, I think there's a real lack of quality in this method.

I use two specific methods for Trend delineation and only two. They are:

•  Displaced Moving Averages

•  The MACD/Stochastic combination.

In this chapter, we will limit the discussion to Displaced Moving Averages. The MACD/Stochastic combination will be covered in CHAPTER 5. The more exotic techniques for defining market Movement (up or down) are contained in CHAPTER 6, Directional Indicators.

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