From the July 01, 2012 issue of Futures Magazine • Subscribe!

Trend Qualification & Trading: Techniques to Identify the Best Trends to Trade

Book Review

By L. A. Little
John Wiley & Sons, Inc.; $60.00; 298 pages

According to L.A. Little, “Trends can be reviewed, qualified and measured to assess their strength or weakness and their probability of continuing.” That’s what this book is all about. Based on his research, Little believes that trends are not completely understood by investors or traders. Therefore, it is necessary to redefine the trend to increase its accuracy to improve the profit potential of each investment or trade.

Little explains how to qualify and identify the market’s trend, and if and when it will continue. Trend qualification involves evaluating a set of trends as suspect or confirmed on different time frames. The author believes the combination of price, volume, time frames and the relationship between the general market, sectors and stocks can be used to assess the “true” trend.

Little puts forth four key trading principles:

  • Keep it simple
  • Seek the best return for risk taken
  • Be patient
  • Determine the difference between conviction and obstinacy and know when to draw the line.

Furthermore, the author believes that qualified trends are apparent in all time frames in all tradable instruments. Moreover, he professes that not all trends are of equal quality, as some are better than others. Little uses a systematic approach to trend following and discovers that using trends properly is the key to consistently profitable investing. His approach is borne out by the fact that many technical indicators and trading systems use trends in their identification of the market’s condition.

In two back-to-back chapters, Little compares and contrasts the classical and neoclassical trend models. He sets forth the basic rules and relationships of each model, which entails qualifying the “true” trend as measured by volume and swing points that confirm or draw suspicion to the created trend.

Little begins his review of trends by explaining and identifying swing point highs and lows and then providing chart examples of each. He illustrates how to identify and label the trend using candlestick charts. Then he provides a comprehensive discussion of swing point testing.

Part II of the book transitions from theory to practice in applying the author’s key principles. First, the trader’s time frame is reviewed. This provides useful information for day traders, swing traders, and investors. Next, the proper way to enter and exit trades is explained using a few examples. An interesting discussion of support and resistance anchor bars (a bar where volume increases dramatically compared to other bars), their types and significance is presented. Little then identifies price reversals and how to make price projections.

Realizing that trading individual stocks requires knowledge of the general market’s and sector’s trend, Little reviews the S&P 500’s nine sector ETFs and looks at the components of the XLF (financials). He then constructs a unique nine-box trading cube matrix that captures the time frame (short-, intermediate- and long-term), the instrument (stock, sector, market) and the trend of each instrument. Each box is labeled bullish, bearish or sideways. He then explains how to properly interpret the cube to determine the real-time market condition.

The last chapter combines the elements of Little’s approach by showing exactly how he qualifies trends using a comprehensive example with a detailed explanation. Although there is no bibliography, the author does refer to additional books in the notes section of each chapter.

In summary, this book offers ground breaking material in providing a unique approach to identifying the “true” trend. By learning when to be invested and when to be on the sidelines, traders and investors will be able to improve their bottom line and reduce their risk. Individuals who prefer using a technical approach to the market will benefit from the wisdom that this author provides.

Leslie N. Masonson is the author of Buy DON’T Hold and All About Market Timing, (Second Edition). Reach him at lesmasonson@yahoo.com.

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