Trade the markets that exhibit "trendiness" and stay out of the choppy markets. Of course, there is a catch: The choppy markets could turn into trending markets and the trending markets could turn into choppy ones! You're probably saying, "Gee, thanks Einstein! How in the world will I know when the market is switching from 'choppy' to 'trendy' or vice versa?" Unfortunately, this is not an easy task. But don't attempt to PREDICT when the change will occur. Instead, make a plan to REACT once the change happens by monitoring the markets and measuring their ability to trend according to technical price action. As long as they are staying consistent with parameters that define a trend keep on trading them. Once the trend measurements start decaying stay out. Also, continue to monitor the choppy markets in case they start lining up with the technicals that define them as a trend. Once this occurs the market is no longer considered choppy and can be traded from the viewpoint of a trending market.

One way to measure the market is the daily or weekly volatility. Track the Average True Range on the weekly and daily charts. Once a daily or weekly bar shows a range that's much larger than the Average True Range of the last several bars you may want to look for entry points in the recent direction of the market. You could even have pre-defined entry points in the market to enter on volatility break outs. This is a common trend following technique.

Another way to measure the trend is to use Moving Averages. If the market can close above a particular Moving Average for a period of time perhaps a trend is materializing. For example, if a market has closed above the 18- or 20-day Moving Average for a month straight, it may be considered in an up trend. Then you should look for buy set ups. You could also use Moving Average crossovers. If a shorter-term Moving Average consistently closes above a longer-term Moving Average for a length of time it may be considered in an up trend as well and traded from the long side. However, once this reverses and the shorter-term Moving Average closes BELOW the longer-term Moving Average the market is at a make-it-or-break-it point. It's time to get flat and observe the market's next move. If the market recovers quickly you have an ideal entry level to get back in long with the trend. If the market has follow thru on the downside instead a trader may look to enter short in anticipation of a trend change.

Donchian Channel break outs are another way to watch for market trends. Richard Donchian published this technique as early as the 1930's and the Turtles (Richard Dennis students) made it famous in the 1980's. Basically, the system goes long if a market breaks the high of the last "N" days or goes short if a market breaks the low of the last "N" days. "N" can be Donchian's original twenty-day break out, Dennis' fifty-five day break out, or any other number that tests well. The point is that a break out could signal the beginning of a trend.

How about the weekly price chart? This may be another good way to define the trend. If the market has made a higher or equal LOW than the previous week for seven out of the last ten weeks, three out of the last four weeks, etc. it is showing a strong pattern of holding support. Also, if the market has made a higher or equal HIGH than the previous week for seven out of the last ten weeks, three out of the last four weeks, etc. it is showing that the bull market is still strong and may have further to run. The inverse applies for bear trends.

Of course, a trader may also wish to combine these methodologies. Perhaps a volatility break out combined with a channel break out would work. Or a weekly pattern recognition combined with a Moving Average crossover. Research these methods and see what shows good results for you.

Looking at the eight different market sectors that futures traders can get involved with (equities, interest rates, currencies, metals, energy, livestock, grains, and softs), there should be plenty of markets to choose from. Maybe too many! Therefore, you may be monitoring several markets but you should only trade in the "cream of the crop" markets that are currently adhering the best to your guidelines of being in a robust trend.

The most important factor in your trading will be your risk management technique. You should ALWAYS keep your risk per trade small enough so that a terrible trade, or even a string of them, will not damage your account bad enough to put you out of the game. You should ALWAYS, ALWAYS use protective stops!! Return ON capital is not as important as return OF capital. Manage your losses. The profitable trades can take care of themselves.

Disclaimer: There is risk of loss in all commodity trading. The data contained are believed to be reliable, but have not been independently verified by Pearce Financial. Accordingly, such data cannot be guaranteed as to reliability, accuracy, or completeness, and as such are subject to change without notice. Pearce Financial will not be responsible for any indirect, compensatory, or consequential damages, including loss of profits which may result from reliance on this data. Pearce Financial and/or its Principals and employees may or may not follow strictly any or all of the trading recommendations contained herein. The risk of trading futures and options can be substantial. Each investor must consider whether this is a suitable investment. Past performance is not indicative of future results.

© 2006 Pearce Financial, LLC
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