Trading With Mesa The Trend Is Your Friend

Allowing time to progress to 890413 as shown in Figure 12-4, we see the current measured cycle is 20 days, as shown in the spectrum display. The 3-day average of the cycle length displayed below the bar chart is 22 days. Note that the price has not touched the trendline in the last half cycle (10 days), so we declare an uptrend to be in force, as indicated by note (3). If we had been really lucky (by being inattentive to MESA signals, for example) we would still have had our long position from the entry on 890327 (see Figures 12-2 and 12-3). A more likely situation is that we would have gone short 4 or 5 days before 890413 on the basis of a MESA prediction, predicting a cyclic downturn at the point marked by note (2). In fact, you can see this downturn starting to form 5 days to the left of the cursor. The cycle mode

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HESfl 3 sap 508 index M992

Figure 12-4 Trend Mode Begins When Price Fails to Cross the Trendline for a Half Cycle

failed. If we had gone short on the basis of cyclic predictions, the only tactic to employ on 890413 is to exit that short for a loss as quickly as possible. Then we would shift strategy to trade the S&P 500 in the trend mode. In the trend mode, one tactic you can employ is to use the instantaneous trendline as the value of your stop on a day-by-day basis. Setting your stop this way has the disadvantage that the gap between the price and your stop can sometimes be large, exceeding the daily limit move. This gap is not terribly significant if you have established a profit position because it is your intent to hold t he posit ion until the trend mode is over. Nonetheless, more conventional trend-following techniques, such as a parabolic SAR, are recommended when the market is in a trend mode.

Figure 12-5 shows that the trend mode ends on 890615 when the price again touches the trendline at the location of note (4). A trend-following system with a relatively tight stop mesa 3 sap see index m9sz date »

(4) TREND NODE ENDS

Figure 12-5 Trend Mode Ends When Price Touches the Trendline

BEGINS; SHIFT STRATEGY SHORT ON THE BASIS OF CYCLES STRONG CYCLE

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BEGINS; SHIFT STRATEGY SHORT ON THE BASIS OF CYCLES STRONG CYCLE

(4) TREND NODE ENDS

Figure 12-5 Trend Mode Ends When Price Touches the Trendline probably would have had us exit the long trade before MESA declares the trend to be at an end. Note that the dominant cycle measurement has spikes, indicative of an erratic measurement, while the trend mode is in force. This erratic cyclic behavior when the market is in the trend mode is the reason we ignore all cyclic outputs, such as the prediction. The dominant cycle measurements calm down and again become consistent near the end of the trend mode. Since the dominant cycle measurement has more stability near the end of the trend mode, we can have greater confidence in the MESA predictions.

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