Trend Trading Algorithm

A trading algorithm that helps you identify the trend.

The Story

My Trend Trading Algorithm is the result of years of refinement. Initially, I made it to simply analyze trends across multiple timeframes. However, due to the number of timeframes analyzed, it was simply confusing. About two years ago, I added a great feature to this algorithm and created a formula to score the trend. Each trend has its own weighting, with more important trends being weighted more heavily.

This trend score paints a picture that is easy to see. When the score is positive, the bulls have more momentum than the bears and vice versa. The trend is something that is extremely important to know as a trader and sometimes it can be hard to see. With this mathematical formula, the computer does all the analysis needed to know which way the tide is going.

In addition to identifying the price trends in the stock, it also identifies the trends in the volume. I used the volume price analysis methods taught to me by both Richard Wyckoff and Anna Coulling in order to make this program. I added in a feature that also shows the trends in volume, whether it's increasing or decreasing on different timeframes.

By analyzing both the price and volume trends, you can get a full picture of what the underlying forces of the market are doing.

How to use it:

Trend scores range from -10 to +10, yet the highest scores aren’t the best. They simply indicate that a stock has been in its trend for some time. A score of 0 signifies neutrality, indicating a lack of clear trend where bulls and bears are evenly matched. On the scale, a score of 5 sits at the midpoint, suggesting a bullish-leaning trend, while -5 indicates a bearish-leaning trend, both falling within their respective ranges.

The most power trading signal occurs when a score falls within the middle range of these two extremes, between 4 to 7, accompanied by strong volume aligning with the trend. This combination presents the strongest reading for a stock's trend.

Now, let's delve into how to interpret each possible score you might encounter.

The Basics:

+8 to +10: Stock is in an uptrend on most timeframes. Usually, stocks with trend scores this high are a bit overextended and a time of consolidation or a pullback could be near. Especially if the score is +10.

+8 to +10 with Decreasing Volume on Multiple Up-Trending Timeframes: Stock is ripe for a pullback. The volume decreasing as prices increase shows weakening demand at higher prices. Could be a good time to look for a short entry.

+4 to +7: Stock is in an established uptrend.

+4 to +7: with Decreasing Volume on Multiple Up-Trending Timeframes: Stock could be ready for a short-term pullback or consolidation. Not a very decisive reading. Demand is decreasing as prices increase.

+4 to +7 with Increasing Volume on Multiple Timeframes: Demand is increasing as prices increase, a bullish reading. The stock can head higher.

+1 to +3: The trend is overall pretty weak. Anything could happen. Bulls are somewhat in control, but that could change pretty easily.

0: Completely neutral score. The stock is at a crucial tipping point. A notable move in either direction could be the start of a larger move.

Additional Notes:

If the trend is positive and the uptrends are on increasing volume, that is bullish. The more uptrends that are on increasing volume, the better.

If the trend is positive and the downtrends are on increasing volume, that is neutral. The bullish price movement is canceled out by the bearish volume indication.

In general, increasing volume in the direction of the trend adds to its strength. Decreasing volume in the direction of the trend decreases its strength. And Increasing volume in the opposite direction of the trend decreases the trend’s strength.

The performance of a stock after earnings doesn't really seem to depend on the trend very much. A stock can be in an established uptrend or downtrend and go the complete opposite direction.

Examples:

+8 to +10 with Decreasing Volume on Multiple Up-Trending Time Frames:

Stocks with this reading can easily pullback. The volume decreasing as prices increase shows weakening demand at higher prices. As the stock goes higher, there is less and less demand. This could be a good time to look for a short entry or just sit out.

+8 to +10 with Increasing Volume on Multiple Up-Trending Time Frames:

Stocks with this reading are quite rare. In these situations, the stocks can continue higher. Demand is increasing as prices increase. I recently saw this type of reading in both SMCI and NVDA during their massive run ups.

+8 to +10 with no Decisive Volume Readings:

When a stock gives this reading, it can oftentimes mean a time of consolidation could be near. A score of +10 is indication that the stock may be a bit overextended and may need to consolidate.

+4 to +7 with no Decisive Volume Readings:

This type of score is leaning bullish, but not decisively. If it breaks its ATH on high volume, the trend will be quite bullish and it can take off. However, a couple of decent down days could bring this trend back down into the +1 to +3 range, a weak trend.

+1 to +3 with no Decisive Volume Readings:

This trend is leaning bullish but isn't very strong. The QQQ will need a strong up day on high volume in order to get into a more definitive trend.

-4 to -7 with Decreasing Volume on the Downtrend:

This reading is leaning bearish, but it is a weak trend. I would be hesitant to take any trades on this right now until it has a high-volume push in either direction. Bulls and bears are currently fighting. The short-term trend is up, but the medium-term trend is down.