T.R.E.N.D. Analysis
Developed while thinking of a quick method of easily memorizing the
"basic steps" that I try to employ as I technically analyze the stock
charts that I come across on a daily/hourly basis...
Without further delay, here is KayLine Strategies'
original concept: T.R.E.N.D. Analysis
I was in Atlanta, GA sitting in on a Master Trader Advanced Class
(taught by the "Teach Me To Trade, Inc." Company) trying to figure
out a way that I could streamline my own personal trading rules
into an easily remembered, yet personal, process. What I finally
came up with was an acronym that embodied every step of my own
trading rules including: trade identifiers, time/type of trade, entry
and exit points; miscellaneous items to consider; technical analysis; and
an absolute conclusion...the decision. The acronym that I ended up
deciding upon was: T.R.E.N.D., which is obviously also a copious term
that is frequently used in trading vernacular. I eventually
implemented it fully into my own personal trading and it has served
a very important purpose for helping me grow into a more comfortable
and confident trader.
Please, always keep in mind that I am NOT a financial advisor
of any sort, nor do I pretend to be. I am merely an educator by trade
and a trader through my own personal education. This is simply a
personal theory that I developed, which helped me grow much
more comfortable in my own shoes as a developing trader and teacher.
This may not be your cup of tea, but maybe it will set off a train
of thought, which may assist you in developing your own set of "rules"
or "guidelines" as you endeavor to become a more efficient and thorough
trader. Be advised that I am not recommending nor advising that you
should implement this into your own trading. I am only sharing with
you my thoughts, ideas, and opinions so that it may serve as merely
a stepping-stone for your own development of trading rules and so forth.
Be smart. Be yourself. Be open to other ideas. BE WISE!!!
T.R.E.N.D. Analysis
T - Trend
The first step that I thought was most crucial towards successfully
analyzing any stock chart or setup was to correctly and efficiently
locating/establishing the most current TREND of the stock chart
that I'm looking at.
I felt that everything else that followed would be heavily dependent
upon my ability to comfortably locate and establish the TREND. Whether
the current trend of the stock was "up" (bullish) or "down" (bearish)
was not important because I do feel confident in my abilities to go
long or short in any situation, but what was important was how
comfortable I was in actually discerning whether or not the TREND of
the stock was bullish or bearish.
There is a manner in which I like to go about finding the true nature
of the current TREND of any security I'm looking at. I call it,
"Chart Reading 101" and it includes:
LOCATING THE TWO MOST RECENT, ESTABLISHED, AND
SIGNIFICANT SWING HIGHS AND SWING LOWS.
ONCE I HAVE LOCATED THE MOST RECENT SWING HIGH POINTS ON THE CHART,
I SIMPLY CONNECT THOSE POINTS WITH A TREND LINE AND EXTEND IT
UPWARDS THROUGH THE END OF THE CHART. I THEN DO THE SAME FOR THE
SWING LOWS. THIS GIVES ME TWO LINES ON MY CHART THAT ARE PRETTY
IMPORTANT BECAUSE THE INDICATE TO ME WHERE THE EMOTIONAL LEVELS OR "PRICE
MEMORY" AREAS ARE IN THE CURRENT TREND THAT THE STOCK IS TRADING IN.
I THEN GIVE THE TWO TREND LINES THAT I JUST DREW THEIR OWN SEPARATE
NAMES, IN ORDER TO IDENTIFY THEM AND THE AREAS THAT THEY REPRESENT.
THE "TOP TREND LINE" CONNECTING MY SWING HIGH POINTS IS NOW MY
"RETAIL AREA" AND THE "BOTTOM TREND LINE" CONNECTING MY SWING
LOW POINTS IS NOW MY "WHOLESALE AREA". THE THEORY IS NOW
THE SAME AS IN ANY MARKETPLACE WE MAY FIND OURSELVES IN. AS CONSUMERS,
WE WOULD ALWAYS LOVE TO BUY OUR PRODUCTS AS CLOSE TO "WHOLESALE" LEVELS
AS POSSIBLE. IF WE ARE BUSINESS-MINDED PEOPLE THEN WE WOULD SIMPLY
TAKE WHAT WE JUST BOUGHT AT WHOLESALE AND ATTEMPT TO SELL IT FOR A PROFIT
NEAR "RETAIL" PRICING LEVELS! IT'S BASIC BUSINESS AND ECONOMICS THAT
WE'VE BEEN INVOLVED WITH SINCE WE WERE CHILDREN AND RAN OUR OWN LITTLE
LEMONAIDE STAND IN THE FRONT YARDS DURING THE SUMMER!
Summary: The "T" portion of T.R.E.N.D. Analysis stands for
"Trend", which encompasses the step of identifying the current "TREND" of
the stock by locating the two most recent, established, and significant
swing high/low areas...then connecting those points with a line. These
lines are now called "wholesale (the bottom line) and retail (the top line)"
and if I am looking at an uptrending stock then I insist that the current
stock price is NEAR wholesale levels. I certainly do not wish
to buy a stock that is still near its retail pricing levels and if that
is the case then I simply hold-off on taking any further action and place
that stock into a "watch list" for some other time in the future.
R - Readiness
The second step of my trading profile is called, "READINESS". This step
encompasses two critical ideas revolving around price action and volume.
If the first step (TREND) is in accordance with my desire for a successful
stock set up then this step would be a continuance of sorts.
READINESS would include the following criteria: I WOULD PREFER THAT THE
CURRENT STOCK PRICE IS NEAR THE 20 AND 13 DAY MOVING AVERAGE
AREA. THIS MAY SEEM LIKE A REDUNDANT STEP BECAUSE IN MOST CASES,
THE 20/13ma AREA WILL BE APPROXIMATELY IN THE SAME AREA AS OUR "WHOLESALE"
AREA. THIS IS NOT ALWAYS THE CASE, HOWEVER...AND I AM ALWAYS VERY
MINDFUL OF EVER BUYING ANYTHING THAT IS TOO FAR AWAY FROM THIS AREA BECAUSE
THERE DOES SEEM TO BE A FAIRLY RELATIVE CORRELATION BETWEEN THE 20/13ma AREA
AND THE AREA WHERE A STOCK SEEMS TO PIVOT DURING ANY RESPECTABLE TREND.
I WOULD ALSO LIKE TO BE VERY MINDFUL OF THE TYPE OF "CANDLE STICK" THAT
IS SHOWING FOR THE CURRENT DAY. THERE ARE SEVERAL TYPES OF "INDICATOR"
CANDLE STICKS THAT HAVE THEIR OWN NAMES AND IDENTIFICATION, BUT I'M NOT
TOO WORRIED ABOUT THAT. WHAT I AM WORRIED ABOUT IS THE ACTUAL SIZE OF
THE CANDLESTICK BECAUSE OF TWO THINGS. FIRST, A SMALL CANDLESTICK DOES
SEEM TO INDICATE "CHANGE" OR PIVOT AREAS BECAUSE OF THE TYPE OF EMOTION
THAT IS INVOLVED WITH THE DAY'S PRICE ACTION. A SMALL CANDLESTICK WOULD
INDICATE THAT THE EMOTION OR SENTIMENT IS CHANGING. SECOND, A SMALL
CANDLESTICK MEANS SMALL RISK BECAUSE MY ENTRY PRICE FOR THE NEXT DAY WILL
MORE THAN LIKELY BE SOMEWHERE JUST ABOVE THE HIGH OF THE DAY, WHILE MY
"STOP-LOSS" PROTECTIVE ORDER WILL MORE THAN LIKELY BE SOMEWHERE BELOW
THE LOW OF THE DAY. THE SMALLER THE DISTANCE BETWEEN THOSE TWO POINTS,
THE SMALLER THE AMOUNT OF CAPITAL I WILL BE RISKING WITH THE TRADE.
I ALSO KEEP AN EYE ON THE DAILY VOLUME LEVELS THAT THE STOCK IS SHOWING.
I AM MINDFUL IF THE VOLUME OF THE CURRENT "PULL BACK" IS SUPERCEEDING
THE VOLUME OF THE MOST RECENT RALLY. I AM LOOKING FOR NORMAL VOLUME
AND TRADING, WHICH IS ANOTHER WAY OF INTERPRETING EMOTION. I WOULD LIKE
THE VOLUME OF THE LAST FEW DAYS (WHILE THE STOCK HAS BEEN PULLING BACK
TO THE WHOLESALE AREA AND 20/13ma AREA) TO BE LOWER THAN THE IT WAS
DURING ITS LAST, MOST RECENT RALLY.
SUMMARY: The "R" portion of T.R.E.N.D. Analysis stands for
"READINESS", which encompasses the area that the stock is in. I am
mindful of its proximity to the 20/13ma and would prefer that the current
price is somewhere near that area. I am also mindful of the type
of candlestick that is showing for the day. I would prefer a small candlestick
that has some sort of an indication of "change". A classic "doji" candle
would be perfect, but is not always the case. I'm much more interested
in interpreting the emotion that the candlestick is indicating. Lastly, I
am mindful of the daily volume that has been happening lately and would
prefer that the volume of the current pullback does not supercede the
volume of the most recent, but previous rally of the stock.
E - Equity
The third step of T.R.E.N.D. Analysis is called "Equity" and it encompasses
everything that is "financial" about the proposed trade. There will more
than likely be money debited from my capital account for this trade and
I need to make sure that I am completely comfortable with that amount, otherwise
I simply do not do the trade. I also need to figure out the exact
amount of capital that will be at risk with the proposed trade because
I certainly need to know who much I could lose if the trade does not end
up panning out the way I had anticipated. With trading, anything can
happen and I need to be comfortable with the amount that I am risking.
IF I AM AT ALL UNCOMFORTABLE WITH THE TOTAL AMOUNT OF "RISK CAPITAL" THAT
WILL BE NECESSARY FOR THE TRADE THEN I HAVE TWO OPTIONS. ONE, I CAN
SCALE BACK MY SHARE SIZE AND BUY LESS AMOUNTS OF SHARES IN ORDER TO CUT
MY OVERALL RISK. TWO, I CAN OPT TO SIMPLY NOT DO THE TRADE AT ALL.
I WOULD ALSO LIKE TO FIGURE OUT WHAT MY PROPOSED PROFIT TARGET FOR THE TRADE
WILL BE. I SET A TARGET AREA BY LOOKING AT THE CHART AND FIGURING OUT
WHERE I BELIEVE THE STOCK PRICE WILL MEET UP WITH MY "RETAIL" LINE IN THE
COMING DAYS. THE KEY INGREDIENT FOR THIS IS TO BE REASONABLE AND
REALISTIC WITH WHERE I SET MY TARGET AS AN EFFORT NOT TO MANIPULATE
MYSELF INTO THINKING THAT THE TRADE LOOKS BETTER THAN IT ACTUALLY DOES.
I THEN DIVIDE THE AMOUNT OF PROPOSED PROFIT BY THE AMOUNT OF CERTAIN
MINIMAL RISK. THIS FIGURE WILL THEN GIVE ME WHAT IS CALLED A "REWARD TO
RISK RATIO". I HAVE A PERSONAL RATIO OF AT LEAST 2.0, WHICH MEANS THAT I
DON'T DO THE TRADE IF I HAVE ANYTHING LESS THAN 2.0
SUMMARY: The "E" portion of T.R.E.N.D. Analysis stands for
"EQUITY" and encompasses everying of a financial nature regarding the
proposed trade. I have a personal "reward to risk" ratio of greater than
2.0 and need to be completely comfortable with the total amount of my
trading capital that will go into the opening of this position. It is also
imperative that I am at ease with and fully accept the amount of "risk
capital" that will go into this position because it is obviously a very
real possibility that I could lose that amount of money. If I am at all
uncomfortable with this amount of risk then I either scale back on my share
size (ex...buy 50 shares instead of 100) or simply opt out of the trade
altogether.
N - Notables
The fourth step of my trading acronym is "NOTABLES" and it includes things
such as checking the news headlines surrounding the company that I am about
to trade; checking the earnings announcement; doing whatever "fundamental
analysis" that I see fit to do; and confirming the trend on a larger
time-frame just to make sure I'm not going against a larger, more stable
trend.
IT IS IN MY BEST INTEREST NOT TO TRADE THIS STOCK IF IT WILL BE
ANNOUNCING ITS QUARTERLY EARNINGS REPORT DURING THE SAME TIME I'LL BE
HOLDING IT. EARNINGS SEASON CAN BE A VERY, VERY VOLATILE TIME IN THE LIFE
OF A STOCK AND I DON'T FEEL COMFORTABLE LEAVING MY PROFIT OR LOSS AT THE
HANDS OF COMPLETE AND UTTER EMOTION. STOCKS HAVE BEEN KNOWN TO GAP UP OR
DOWN ON A WHIM DURING EARNINGS REPORTS AND SOMETIMES IT DOESN'T EVEN MATTER
IF THE REPORT WAS GOOD OR BAD (see Google during its January '07 report).
I WOULD LIKE TO KNOW WHAT IS GOING ON WITH THE COMPANY IN REGARDS TO RECENT
NEWS EVENTS. SOMETIMES, A STOCK CAN GIVE US A GREAT SETUP THROUGH EVERYTHING
TECHNICALLY, BUT WITH THE INCLUSION OF A DAY'S EVENTS AND NEWS HEADLINES
THAT WE MAY NOT KNOW ABOUT, THE SETUP COULD END UP BEING NOTHING MORE THAN
A PRETTY LITTLE PICTURE. BE AWARE OF THE SECTOR/INDUSTRY THAT YOU ARE
TRADING, TOO. SOME INDUSTRIES AND SECTORS ARE MUCH MORE VOLATILE THAN
OTHERS.
WHEN I "CONFIRM" A CHART, IT SIMPLY MEANS THAT I TAKE A SNAPSHOT OF WHAT
IT LOOKS LIKE ON A LARGER TIME FRAME. IF I FOUND THE SETUP THROUGH A
SIX MONTH/DAILY CHART THEN I'LL "CONFIRM" IT BY LOOKING AT A TWO YEAR/WEEKLY
CHART AND MAKE SURE EVERYTHING LOOKS NORMAL. I WOULD HATE TO GET INTO
A STOCK THAT LOOKS PRETTY DECENT ON THE SHORT-TERM SETUP, BUT LOUSY ON
THE LARGER TIME-FRAME SETUP. THIS STEP DOESN'T TAKE BUT A MINUTE OR TWO
BECAUSE I'M NOT REALLY ANALYZING IT FOR ANYTHING OTHER THAN THE OVERALL
TREND AND POSSIBLY SOME SUPPORT/RESISTANCE LEVELS.
SUMMARY: The "N" portion of T.R.E.N.D. Analysis stands
for "NOTABLES" and includes the ancillary measures of "everything else" that
goes into analyzing stocks. I am most concerned with finding out when
the company is planning on releasing its quarterly earnings report, but
not that concerned on what their earnings actually are. I may decide to
do a bit of fundamental research, but I tend to rely more heavily on the
technical side of things because I am more of a "short-term" trader as opposed
to a "long-term" trader because I don't tend to "buy and hold" stocks. I
am also concerned with finding out a little bit of what has been going on
with the company in regards to news events. Is the company being investigated
by the S.E.C.? Is the CEO under indictment for something? Is the F.D.A.
about ready to announce an approval/disapproval of a pending product? This
type of information would be very beneficial to know for obvious reasons. I
would also take the time to "confirm" the chart setup by simply looking
at a larger time frame and making sure that there is still ample room
for the stock to move compared to its most recent price memory (support
and resistence). "NOTABLES" really just includes "everything else" that
is either ancillary or primary, depending on your type of trading.
D - Decision
The last step of my trading rules is "DECISION" and it's by far the most
simple of all the steps. If I have gone through the first four steps and
feel that all of my requirements/criteria have been met then the DECISION
is easy! If there is one or two things that I'm not quite comfortable
with then I will probably "DECIDE" to hold off on placing the trade until
I can get more information or allow the stock to either prove or disprove
my thoughts/feelings.
THIS STEP SHOULD BE VERY EASY TO MAKE AND IF YOU FIND THAT YOU ARE
STRUGGLING WITH MAKING A DECISION ON WHETHER OR NOT TO BUY OR SELL-SHORT THEN
THAT IS PROBABLY A TELLTALE SIGN THAT THE DECISION YOU SHOULD MAKE IS
TO NOT GET YOURSELF INTO THIS POSITION. IT MAY JUST BE YOUR EMOTIONS
THAT ARE GIVING YOU PAUSE, BUT YOU SHOULD HAVE DONE ENOUGH PRACTICE (virtual
trading) BEFORE YOU BEGAN "LIVE TRADING" THAT THE STEPS YOU HAVE CREATED
ARE NOW HABITUAL AND MECHANICAL.
SUMMARY: This step is by far the quickest of them all, but
not necessarily the easiest. You should eventually get to the point
where you have the same basic type of emotional response to a losing
trade as you have with a winning trade. The steps involved in making the
decision will hopefully become habit and second-nature because you have
trained yourself accordingly. Notice your thoughts as you are about to
"DECIDE" on whether or not you should get into this position because if
you are feeling hesitant then you should probably not do the trade. There
is no shame in virtual trading because you will still get the much needed
experience through that virtual trade as you would have gotten through
a live trade. Practice makes perfect.
Again, I emplore you to find your own rules and criteria for entry/exit
of your desired positions. This is something that I have created to
help me stay on track and develop discipline, which you're certainly free
to use should you so desire. I am in no way saying that if you follow
these few rules that you'll have nothing but successful trades from here
on out. One of the most basic of all "rules" to accept when getting
into the stock market is that ANYTHING CAN HAPPEN and you had
better accept that simple fact before proceeding because I can attest
to the truthfulness of that statement. Anything can happen and in
the stock market...anything does happen, if you know what I mean!
GOOD LUCK...AND HAPPY TRADING TO YOU ALL!!!
Created by M.J. Kleinhenz -- KayLine Strategies, L.L.c. -- 2003