THE ROLE OF THE TOTAL TREND- a tribute to late Hank Pruden.
Over time I have interacted with many technical analysts. Some have learnt from me, some come to me to clarify certain things while some others come to learn more esoteric aspects. Many are seeking jobs or working at one or running a service. Some use it to trade and invest for themselves. They have varying degrees of success applying what they know and their situation in life can and is many times a reflection of how much success they have had with TA.
I have found two common threads running within those that are not successful. And these are: looking at the trend only in the very short term and second, a difficulty in application.
One may be surprised to find the Trend aspect being mentioned because the study of TA starts and continues to address all through, the study of the trend. But it never ceases to amaze me as to how little attention is paid to the trend status thru different time frames. The importance of knowing the influence of the larger trends cannot be stressed enough. Perhaps it is the demand of the market place which is focused intensely on the ever shrinking short term. The need to make market calls (demands of a job or a service) and be in the trend of the moment makes it quite difficult to analyse the larger trend. Thus they end up taking recourse to signal generation ways and going down in the time frame of the chart they take such signals from.
Whatever the demands of your job or business, the market knows or accepts none of it. The cycles of time are going to run whether you have a high-demand client or job. So how do we solve that? There is only one answer. Study all the trends outside of your professional time- i.e. post market, when you are at home, on weekends, in the mornings of working days etc. That is the only time you get when the pressure of a moving market is not distracting you all the time. Markets don’t move and you will still find what you left where you left it! Map the trends of the higher time frames and make the context for what is happening in the present. All we have is past data. But what we need is a future forecast. And that has to be made in the present where everything is happening.
The past data analysis gives Your perspective. This one must develop. It lays the background in which we can study and interpret what is happening in the present. This is where you study and internalize the different cycles that are at play in the stock (short, intermediate and long term) and distill information from those cycles to understand what is the possibility for the micro cycle. I call it the Total Trend. It can help one decide whether the day ahead is a buy/sell/do nothing type of day. This first level filter then enables one to gauge how well a chosen stock can perform. The average volatility of any stock is around 2% for a day. The Total Trend decides whether or not there shall be greater than average range that shall manifest; it decides which side- up or down- the stock shall predominantly trade for the day. In short, the Total Trend becomes the one single factor that decides whether your trading call shall succeed normally or spectacularly or fail.
This recognition of the Total Trend is even more pertinent when one is generating investment calls. Mostly, TAs relies upon momentum and breakouts to spot such opportunities. These work- but during bullish times only! While it is undeniable that the method (i.e. momentum breakout) does work well, a failure to know what the Total Trend is will often lead to failures. A long time ago, the late Hank Pruden, one of the doyens of modern technical analysis, told me that the major trend of the market has about 40% influence on the outcome; then another 40% influence is exerted by the trend of the sector; and only 20% of influence really comes from the individual stock. He said that this is true whether one is analysing the stock using technical or fundamentals. The advantage of doing TA is that you can address 100% of the requirements (market, sector, stock) whereas fundamental analysis looks at only 60% of the requirements (sector and stock). Remaining fixated on the momentum breakout of a stock is like addressing about 10% of the requirement!! During bullish times the market is doing well so your 10% effort automatically becomes 50% and in such times the breakouts occur in sectors that are doing well. So your score becomes 90% – without you even knowing it! The call succeeds and you think you are a genius! That is the impact of the Total Trend at work! Come bearish times and your call remains at 10% and they all go phutt……and you are clueless about what’s going wrong! The Total Trend was against you but you only looked at a small wave within an overall ocean and dived in.
I wrote at the start that there are two difficulties or reasons for lack of success. This is an essay largely about the first one (Trend) and how to implement a solution for it. The second one is an essay for another time. While the strength of TA may be to address as low time frames as one needs to, realize that the influence of the higher time frames doesn’t go away just because you dropped down in time. The more you go down in time, the greater the need for skillful execution. This is why that zone (extreme short term) has been taken over by machines. It won’t be long before the machines start moving up in time frame (shades of the Matrix here??) and so, your competition is going to increase. But for one who has the grasp of the Total Trend, the market affords unlimited opportunities irrespective of whether it is bullish or bearish times.
At the end, I doff my (non-existent!) hat to the great (late) Hank Pruden who said, Don’t get bogged down in the 20%- go for the whole Nine Yards!