Theory  |  JAN 1992

Futures According To Trend Tendency by E. Michael Poulos

Futures According To Trend Tendency by E. Michael Poulos Not all markets have the same tendency to trend. E. Michael Poulos uses his February 1991 STOCK & COMMODITIES article, ""Of trends and random walks,"" on the random walk index, which separates trends from random drifts by allowing for trend, as the basis of this article. He explains that the commodity futures you may for one reason or another assume trend strongly may not in fact. By using similar methods as previously, he produces a table of 28 commodities futures and debunks some futures assumptions — for instance, there is a school of thought that assumes that crude oil, gasoline and heating oil all show similar trending tendencies, whereas in truth crude oil and gasoline are near the top of the list, and heating oil, the poor country cousin, comes out only near the middle. Poulos goes into why. Which futures trend strongest? My February 1991 article, ""Of trends and random walks,"" explained how the random walk index, which separates trends from random drifts by al- lowing for the direct measurement of trend, could be used toward this end. (See sidebar, ""The random walk index."") By using a view of price-time history similar to the one used previously, we can determine how to rank various futures according to their inclination of trend. We attempted to maintain objectivity by not requiring the arbitrary choice of a predetermined fixed lookback interval (for example, the length of a moving average). Other attempted rankings of this kind are often questionable in result because they do not specially distinguish between random drifts and trends. Some results may surprise you. For example, do you believe wheat trends stronger than corn? Or cattle trends stronger than hogs? Wrong. Cattle and wheat are the weakest of the 28 futures covered here. Corn, on the other hand, ranks near the top, sixth out of 28. Do you figure crude oil, gasoline and heating oil all show the same tendency to trend? Wrongo! Crude oil and gasoline are near the top of the list, while heating oil is well down toward the middle. Some explanations are in order. The average channel height for yen (Figure 1) provides some. For the four-day channel length, for example, we start at Day 4 and look back for the highest high and the lowest low from Day 1 through Day 4. We record that high to low difference. We then repeat the above for Day 2 through Day 5, 3 through 6 and so on. We then average all these heights to get the average channel height figure for four day channels. This process is then repeated for each of the a various channel length (that is, lookback intervals). The 2.29 ratio on the four-day row for yen is obtained by dividing the average four-day channel height by the average one-day channel height (141.7 divided by 62.0). For the sake of brevity, we show the average channel height only for yen, but the same procedure was used for all 28 futures (Figure 2).

by E. Michael Poulos