Will The Real Trend Line Please Stand Up?

Our buy and sell signals are based on our Trend Tracking Indexes (TTIs) crossing their respective trend lines (39-week Simple Moving Average). Reader VR posed an interesting thought about it:

Thanks for your response to my question about trend tracking on Saturday (11/16). I understand no strategy works all the time and so you have adapted to more volatile reality of the market in the last few years. I have a related question.

By buying and selling more frequently, are we not following a shorter MA trend line without putting that in words? For example, what we end up doing is more or less selling with a 7% trailing stop on a 50 Day MA instead of 200 Day MA of our published trend line.

In general, we want our new invisible ‘trading’ trend line to follow the chart steepness of a particular security as closely as possible while we still have our long term ‘zoning’ trend line of 200 Day MA as our guide.

The idea is not to buy and sell more often. Our buy signals are generated based on the Trend Tracking Indexes (TTIs) crossing their long-term trend line (39 week SMA). To me, that would be quite different from buying and selling based on a 50-day moving average trend line, which would definitely increase the frequency of your signals.

While the trailing sell stop is based on a fixed percentage, I don’t think that really shortens the trend line we’re following. The idea is to simply control downside risk as much as we can without waiting for the TTI to pierce its actual 39-week MA.

As I posted before, waiting for the long-term trend line to be pierced to the downside will only work to your advantage if your price line is within close proximity of the trend line. If it’s not (right now it’s +8.83% above it), and you wait for it to happen, you are guaranteed to turn a potential profit into a loss, since the TTI drops at a much slower rate than the price of the security your tracking.

If it seems to you that we are following a new “invisible trading trend line,” that’s fine, as long as you follow its signals and protect your portfolio when this rally comes to an end.

About Ulli Niemann

Ulli Niemann is the publisher of "The ETF Bully" and is a Registered Investment Advisor. Learn more
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