Is the stock or ETF or market trending? This seemingly simple question can be difficult to answer.
Among other factors, the answer depends on the time frame being used; and the answer could be different in different time frames. For example, prices could be trending in opposite directions in different time frames.
The annoying bit is that it is easy to recognize the trend after the fact. Hence, we have built tools to confirm if a market is trending to help answer the question as early as possible.
One approach is to get a composite answer by using several different indicators, or several different parameter combinations of the same indictor. You then have the problem of choosing and weighting these different indicators or sets.
We have solved this problem by building a composite indicator, the Chande Oscillator Short Term #2 (COST2) using a total of 41 internal comparisons. These carefully weighted comparisons provide a comprehensive check on trend strength and directions.
It is important to emphasize that we mean “short-term” in the relative sense when using daily data. The COST2 indicator can be used on any timeframe, from intra-day on upward.
Observe that the COST2 indicator (see Figure 1) uses a range from +100 (very strong up-trends) to -100 (very strong down-trends). Note that when the trend is strong, the values are “pinned” at +100 (or -100) to reinforce the confirmation. For practical applications, we have drawn reference lines at +50 and -50, implying that the trend is broadly higher (or lower) when the values are above +50 (or below -50).
Naturally, we can debate ad nauseum whether we could have used different weights or used other indicators. The decision-making process for trading requires only that you build heuristics or rules based on your style or experience that support your analysis.
Since the range is +100 to -100, and the neutral zone is from +50 to -50, a variety of trend-following or counter-trend strategies can be built using this indicator.
So, we encourage you to experiment with COST2 to find your comfort level.
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