Principles of Momentum Interpretation 3

There are many types of trends, but the most widely followed are short,
intermediate, and long. These last approximately 3-6 weeks. 6—39 weeks, and 1
—2 years, respectively. When attempt ing to analyze a trend, it is crucially
important to keep in mind the type of trend that you are trying to measure.
Turning an oil tanker around is a much more formidable task than changing the
direction of a sports car. Markets operate in a similar fashion. The reversal of a
short-term trend takes less time and involves a substantially smaller change in
collective psychology than the reversal of a long term trend. This also means
that a signal from a momentum indicator with a long time span has far greater
significance than a buy or sell alen from one with a 5- or 10-day span. Investing
and trading decisions should be made with this perspective in mind.
Most of the material later in this chapter will focus on short, and to a lesser
extent, intermediate trends (i.e., trends lasting 3—6 and 6—39 weeks,
respectively). Nevertheless, it is still of paramount importance for any trader to
gain some understanding of the current position of the long-term trend. Just as
the unwary swimmer finds it difficult to swim against the tide, the short-term
trader will certainly encounter problems if he is swimming against the main
trend. Time and again we find that trend-spotting systems often will lead
traders to make money-losing decisions based on erroneous signals. These are
short and intermediate-term price trends that are swimming against the tide of
the primary trend.
It is not always possible, of course, to ascertain the direction of the main
trend, especially in its initial stages. Even so. it is very important, even for
short-term traders, to try and understand the direction and duration of the main
or primary trend. If you know that the trend is down, and if you are also aware
of the fact that moving against it is usually unprofitable, you will be wary of
taking long positions even though the short-term momentum indicators show
that the momentum is favorable. To do so only invites failure, no matter how
attractive the opportunity may seem at the time.
The momentum indicator is normally plotted as an oscillator underneath
the security that is being monitored, making conve nient comparisons easy.
Occasionally, two or more indicators will be plotted along with the price. This
practice offers a comparison of different momentum approaches or different
time spans. The objective is always to determine whether the weight of the
evidence shows a trend in reversal. The more evidence that points in a