BarroMetrics Views: Trends II
Let’s first look at the assumption I was referring to in the previous blog.
Before I talk about the assumption, let’s first consider why we seek to label the type of structure an instrument may be in.
For me it’s a matter of providing:
- a strategy (i.e. a) long – or short, rotation or one timeframe, b) where do I get in i.e. a zone), and
- a way of assessing my risk.
So, in a sideways congestion and in an uptrend, may both provide a buy signal, but where we enter and the manner of entry (breakout or retracement) is a function of personality and the market structure.With that in mind let’s turn to the ‘assumption’.
My friend assumed that all trends offer the same opportunity i.e. all trends are the same. In fact, of course, they are not. If you consider Figures 1 & 2, both may be said to be trending but I’d find the trend in the USDJPY easier to make money in than the AUDUSD. Indeed, if you use a breakout strategy, you may find that you’d be losing money trading the AUDUSD.
One tool useful in this context is the Kaufman Efficiency Ratio. I don’t use the tool, but students who do use it, have given it 5-star ratings.
What tools do I use and how to I assess the trend? More on Monday.
Turning to the competition.
The key item here was my friend says he makes money in trends. The question I posed: what was a possible dangerous assumption? The answer I was looking for was ‘one strategy for all trends’. That is, he failed to distinguish between the different types of trends.
The most popular reply (i.e. we can make money trading congestions) failed to take into account that by not trading congestion markets may mean he could be sitting on the sidelines for long periods, and may mean he may forgo opportunities, these would not cause losses. And, for this reason, I would not rate the ‘assumption’ as dangerous.
No one came up with this so, the first 3 answers, Shui Sing, Ryan and Paul will win a prize. In addition, I liked the answers from Michael, Sorin, Baz and Gassah. So, I’ll send you a copy as well.
Congrats to all winners! The prize has been sent out. Let me know if you haven’t received it.