The most basic trend systems are those that base their direction on the reaction of prices to events. These events can be government policy announcements, such as interest rate changes, natural disasters that cause a shortage in supply or an increase in demand, war that interrupts production and shipping, earnings reports, and scandals that affect investor confidence.
The impact of these material events can be long-term, temporary, or even structural, but they always cause an immediate change in price. Everyday news is filled with these items that cause investors to either buy or sell, sometimes offsetting the effects of each other. Most often the result on price movement is small, but occasionally it can be a dramatic price shock.
Among the earliest of trading systems are those that signaled a new upwards trend when prices moved higher than they had been for some time. There is no math required, simply the idea that, if prices moved to a new high or new low, then something important has changed. It is intuitively sensible and has proved to be a successful strategy. As you progress through this book and become familiar with more complex and mathematically intricate techniques, continually ask yourself to what degree the newer methods have improved on the older, simpler ways of recognizing a trend.
We begin the presentation of trading systems with these event-driven trends. A fundamental understanding of these methods is essential to every trader. ...