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The Trend Index indicator has been developed to maximize simplicity for the user. The formula itself is a highly complex 4-layer algorithm, which combines a number of important factors to identify the 'mood' or true trend of a stock. Moreover, the end-product is a simple-to-view trading tool [see below] which provides a decisive, objective approach to entering your trades.
On this page you will learn more about the important trend index indicator. However, please note that in order to utilize this powerful trading tool, you do not need to understand all of the intricacies behind it, just like you would not need to learn how to program a computer in order to successfully use a spreadsheet or word processor.
Below is a brief insight into how the trend index indicator was developed...
Many traders rely on some form of chart pattern recognition method. You have probably heard of some of these traditional methods... for example, constructing trend lines, channel breakouts, head and shoulders patterns, cup and saucer patterns, etc. These rely on some form of chart-pattern recognition system, which reveal a degree of information about the stock's [recent] history, and where it is [likely] headed.
The problem with this form of basic analysis is the advent [and increased risk] of 'false' and/or 'artificial' analysis. Most of the traditional types of indicators are too pattern-oriented, and provide false signals. Instead of simply using 'prices' to analyze the direction of the market, we question: Is the pattern backed by actual volume, money flow, and accumulation [real demand backed by net long positions] behind the apparent trend of the stock?
The answer to this key question forms the basis of the trend index indicator. It is essential to factor in the stock price with on-balance-volume, accumulation, and money flow, in order to produce a thorough analysis on the underlying 'mood' of the stock price [or major index]. The result is then smoothed to provides an oscillator, which shows whether the stock is trending up OR down. Essentially, the trend index measure shows real money-backed demand/supply within the market.
The mathematics behind the trend index formula are highly complex, formed by an unbreakable four-layer algorithm.
The good news is that you do not need to learn the complexities of the formula, but simply to understand how to view and use this information, presented objectively, on the screens. Indeed, the result is a smooth oscillator, which provides a fluent 'flow-line' which is either moving UP [positive mood/up-trend] or DOWN [negative mood/down-trend], as shown in the example chart above.
Look to the bottom of the chart, below the main stock-chart, which shows the 'trend index'. The trend index can be viewed for any stock you choose [we hold over 16,000 stocks worldwide in our database]. However, for practical reasons we ourselves prefer to specialize in, and trade only high volume stocks, specifically within the Nasdaq 100 index - our own favorite. But you may experiment with any stock you wish...
Simply click on the "Stock-Charts" link from the left hand side menu on the screen. Then enter any stock or the symbol directly [example: Microsoft=MSFT, Yahoo=YHOO, Caterpillar=CAT, etc.]. If you do not know the symbol of a stock, then click on the 'Symbol Lookup' button/feature built into our software...
As you know, the trend index oscillator flows smoothly as an orange cycle or a gray cycle. An orange cycle indicates that the trend on this stock is UP. A gray cycle indicates that the trend is DOWN.
Aligning the trend index in the stock with the trend index in the major index
In developing the trend index indicator, our goal was to gauge/measure the 'mood' of the market. This means the mood of the stock itself, and [more importantly] the mood of the general market as a whole. This is an important and significant integration.
As we discussed earlier, a market' simply consists of a crowd of people who are either buying or selling. Stock prices are based on the 'perceived' value - what people as a whole 'think' it is worth. Some think it is worth more [buyers] and others think it is worth less [sellers]. These mass 'thought patterns' run in cycles. This is what we call the mood of the crowd/market. When the mood in the "general" market is positive, individual stocks move up significantly. When the "general" mood is negative, individual stocks move down significantly.
Capturing the moods is therefore the key insight into finding opportunities...
If the market is in a 'positive' mood, then bad news will have very little effect on an individual stock price, while good news will drive it further upward. If on the other hand, the market is in a 'negative' mood, then good news will have minimal impact on prices, while bad news will pull it further down.
This truth operates in any free market - property, gold, diamonds, steel, antiques, classic cars, etc. If you have a prime property [perfect location, great schools nearby, all bedrooms en-suite, indoor swimming-pool, complete electrical/plumbing refit, faultless] for sale, and the 'general' market is dull, then no matter how hard you try, you will have a tough time getting a reasonable price [a buyers market]...
On the other hand if the general market is positive, then confident agents in-the-know will bend over backwards to sell your property for you, each one offering to sell it at a higher price/value than the last [a sellers market] and making it happen.
The same principle applies to stocks, and the process is very simple...
At the top of any screen, eg., the Nasdaq 100 Stocks screen, you will see a bar which is either blue or red. If it is BLUE it means that the trend index in the major index [the Nasdaq 100] is UP. Therefore you look at only BLUE stocks underneath. This is what we call 'alignment'.
Through the trend index indicator, which is central to our online software, we are able to gauge [measure] the underlying trend [or 'mood'] of any stock AND any major index. Each individual stock belongs to a group of stocks which make up a major index. For example, the popular Dow Jones Index consists of 30 leading US stocks, such as IBM, Disney, Hewlett-Packard, Coca-Cola, Exxon, Du-Pont, Home-Depot, etc.
Now, if on a particular day, you wanted to trade Coca-Cola stock, it is a very simple step to check the trend index in the Dow Jones Index [the bar at the top of the Dow 30 Stocks screen], AND the trend index in the stock [Coca-Cola] itself which will be BLUE if it is UP. Click on the stock to open up the chart
Every day, this information is provided very simply on our screens, which makes 'finding' the right stocks to trade literally a breeze.
Buying AND Shorting Opportunities
If you look closely at the trend index indicator, you will also note that it is possible to capture the 'down' cycles in a stock as well as the 'up' cycles. The trend index is color-coded for this purpose. Orange means the stock is in an up-trend. And Gray means the stock is in a down-trend...
When both the stock and the major index are in a down-trend [in other words the bar at the top of the screen is RED, and you are looking at stocks which are also RED], then you may use certain instruments [which we will cover later on in this manual] such as Options or CFD's, or spread bets, to profit from the down-swing in the stock.
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