Overview
To better
understand the underlying concept behind the Trend Delineator's ability to
predict major trend changes in the S&P 500, it would be beneficial to
understand moving averages and/or exponential moving averages (EMA). I will
not try to explain the intracacies of EMAs at this time, however there are
numerous explanations on the internet by simply typing in "exponential
moving average" on google or any other search engine. Here is one I
found:
"An
exponential moving average is calculated by combining a certain percentage of
the current value with an inverse percentage of the previous value of the
exponential moving average. For example, if 25% weight is being given to the
current value, 25% of the current value is added to 75% of the previous
moving average to get the current moving average."
Exponential Averages
After you feel
that you have a basic knowledge of EMAs, you should take some time perusing
the eleven EMAs (X5 through X5120) for the S&P 500 from June 9, 1969
through August 22, 1971 that are referenced here:
After reviewing
the eleven EMAs, it is evident that the X5 EMA, the shortest term EMA, is the
most senstive to price movement and the EMAs gradually become less sensitive
as you progress to the X5120 EMA, which is the longest term EMA. Each EMA
could provide a trend following system by itself, whereby buy signals would
be generated when the S&P 500 rises above the EMA, and conversely sell
signals would be issued when the S&P 500 fell below the EMA. An active
trader may prefer a more sensitive trend following system which would
generate more signals and possibly a greater ROI, whereas a long term
investor would probably prefer a less sensitive trend following system that
would trigger fewer signals.
Integration of Variables
After
approximately three years of research, a trend following concept was
developed by Jeff Cambier in 1980 that produced higher ROIs and fewer signals
than any EMA by itself. The proprietary concept incorporates over 70
variables that gauge the overall trend during any market environment. The
Trend Delineator was the result of the integration of these trend following
variables, and is displayed in the graph below for the period June 9, 1969
through August, 22 1971.
|
