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Trend following, trend prediction, trend breakouts (approaches to technical analysis of stock trend) There are hundreds if not thouthands indicators out there, and hundreds trading systems, too. But they all are based on one (or more than one) of the following basic approaches. It is important to keep this fact in mind, as it gives you a "big picture" and in some cases can help to avoid problems. Trend following The idea is simple - we generate trading signals based on what already happened to the stock. Consider MACD or Point-and-Figure techniques. The stock price changes and it will either result in two moving averages intercecting (MACD) or certain pattern appearing on the chart (Point-and-Figure). But they are always late. The moment two moving averages intersect, the stock already moved (up or down) so if we enter the trade, we will gain less - we are late. On the other hand, the decision is supported my the momentum the price movement has at that moment. So it is a concervative way of trading. Trend prediction You can use the Trader day end and day trading simulator to generate buy and sell signals based on the technical indicator macd or point figure charting. But then - sometimes - you may notice that by the time you enter the trade, the trend reversed and you are selling when it is actually time to buy, and vice versa. So you can put a checkbox in the "reverse trades" field and try to optimize a trading system for which the MACD or Point-and-Figure BUY signal generates SALE, and vice versa. For some stocks it works very well, and it is an example of a simple prediction system, too. The way it works, is by saying that "if the stock goes down, it will soon go up". Not a very complex system, but still robust. There are much more sophisticated techniques that can be used to predict stock prices. One of them implemented in the Trader software is called Neural Networks. The trend predicting algorythms are less concervative than trend following algorythms and they may generate dramatically different results depending on the number of things we are trying to take into consideration (should we look at stock price only? Or should we consider DJIA as well? Or...) Breakouts This approach has very little to do with the stock fundamentals, and is based on human psychology. It does not work very well for long-term trading for this exact reason, but may be used with success for mid and short term trading. Imagine the stock moving up, fast. Then we better buy, right? And as we - all of us - buy it, the price will go even higher. And then each of us will have the same thought... ...what have I done?! And then people start selling. Well, some of them also sell because the stock reached their "target price". But the point is - once the stock "jumped" up, it will usually fall, we are talking about short-term moves here. Can we use it? Yes. We buy before the "run" ends and sell at the first signs of slowing down the speed at which the price changes. There are some trading indicators, that are using this approach. Combined systems Finally I should mention, that the "real" trading system might use a combination of indicators, together with risk management rules, so nothing prevents us from using trend-following MACD, then profiting from sudden price move, and then continuing using MACD again, or from exiting a position that we entered using MACD if the Neural Networks / MACD prediction is generating a SELL signal. Whatever trading system you use for technical investment analysis, it should be backtested on the historical stock price data and proven to be stable.

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