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The Trend Model
The Trend Model is an uncomplicated moving-average crossover system that is designed to catch medium- and long-term trend changes relatively early in the move. We use a 20-, 50-, and 200-EMA (exponential moving average) to execute this model, however, another combination of moving averages could be used to design a model more suited to your own preferences.
Primary medium-term signals are generated by 20/50-EMA crossovers. A BUY signal is generated when the 20-EMA crosses up through the slower 50-EMA. When the 20-EMA crosses down through the 50-EMA, either a NEUTRAL or a SELL signal is generated. A NEUTRAL signal (cash or fully hedged position) is generated if the 20/50-EMA downside crossover occurs when the 50-EMA is above the 200-EMA. A SELL signal (neutral or sell short) is generated when the 20/50-EMA crossover occurs when the 50-EMA is below the 200-EMA.
Long-term BUY/SELL signals are generated by 50/200-EMA crossovers.
To clarify, a long position may be considered each time a 20/50-EMA crossover BUY signal is generated; however, the long-term 50/200-EMA crossover status must be consulted before considering short positions on a 20/50-EMA crossover SELL signal. Short positions should only be considered when the long-term 50/200-EMA is on a SELL signal at the time a 20/50-EMA SELL signal is generated. Otherwise, move to cash (neutral). This is a conservative approach to playing the short side of the market. It is designed to avoid the frequent whipsaws that will occur during bull market corrections, and it limits exposure on the short side to down legs in bear markets.
This model should not be used to manage a portfolio with 100% of the portfolio invested in a single position. Indeed, no timing model should be used in that manner. Always use good money management techniques.
THE SIGNALS GENERATED BY THIS MODEL SHOULD BE CONSIDERED AS INFORMATION FLAGS, NOT ACTION COMMANDS. CHART ANALYSIS MUST BE PART OF YOUR DECISION PROCESS.