Trends (price direction over time) are set by the flow of investment money into or out of a market. Using a simple momentum indicator - the four-week rule - we can generally stay in step with the trend.
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Markets indicate real supply and demand through spot/cash price, basis, futures spreads, and forward curves.
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I saw a discussion on the social media site LinkedIn recently with the poster stating he wanted a simple trading system, rather than one filled with all the equations and statistics that drive most algorithms these days. (It’s at this point I could veer off and discuss how unsophisticated – or stupid – the artificial intelligence behind the algorithm trade industry actually is based on how easily it can be manipulated by social media posts. We’ve seen over the past decade how this has become the game within the game, guessing what the next post – usually not quite true – will be. But that’s a bigger subject for another day.) This brings to mind the age-old debate of if the algorithm-driven investments side of the market is trend following or trend setting. Based on my application of Newton’s First Law of Motion applied to market analysis, a trending market will stay in that trend until acted upon by an outside force (from John J. Murphy’s “Technical Analysis of the Futures Markets”, 1986 edition, page 3), I’ll continue to hold to my belief algorithms are trend setters. This brings up another larger discussion of the value of technical analysis given algorithms do not use classic technical patterns.
