Trend Analysis: Pick a Definition First
Trend analysis is deciding which way a market is going and how strongly, and the three standard methods - swing sequence, moving average and efficiency ratio - can each give a different answer on the same chart. Choosing one and stating it is what makes the reading reproducible.
How it works
Trend analysis answers two questions. Which direction, and how strongly. Most disagreements about a chart are really disagreements about the second one.
There is no single definition, and that is the whole difficulty. Three are in common use, they are genuinely different, and they routinely disagree on the same chart on the same day.
The three methods
The swing method reads a sequence. Higher highs with higher lows is an uptrend. It is precise once the swing threshold is fixed, and meaningless until it is — a 0.5% filter finds 175 turning points on this site’s shared history and a 3% filter finds 15.
The moving average method reads a line. Price above a rising moving average is an uptrend. It is unambiguous, it needs no judgment, and it is always late by construction.
The efficiency method reads a ratio. Net distance travelled divided by the total path taken to get there. A market that goes straight up scores near 1.0; one that ends where it started scores near zero. It is the only one of the three that measures strength directly rather than inferring it.
What the strength reading says
On this site’s shared 576-bar history the ten-bar efficiency ratio has a median of 0.34. The typical stretch of ten bars covers about a third of the distance it actually travelled.
Only 30% of bars scored above 0.5. Seven bars in ten sit in conditions where price is churning rather than travelling — which means the default assumption on any given bar should be that there is no trend to analyse. That single number reframes the whole exercise: the useful question is not which way the trend is going but whether one is present at all.
In practice
Participation is the fourth input and it is free. Volume expanding in the direction of travel and thinning against it supports whatever the price reading says.
A trend reading without a stated timeframe is not a reading. The same chart is in an uptrend hourly and a downtrend daily constantly, and neither answer is wrong.
A gap can flip a swing sequence overnight, which is why an analysis done at the close needs re-checking at the open rather than acting on.
No method produces a risk level. The stop comes from structure, and the analysis only tells you which direction to be looking in.
Every revision has a price. Switching direction is a round trip at 2% of a median bar’s range on this history, which is the real cost of an unstable definition.
A trend is a description you impose, not an object in the market. The order book contains prices and sizes; the trend is a summary you computed from them, and treating it as a thing with momentum of its own is where most of the trouble starts.
Running all three at once
The honest way to use three disagreeing methods is as an agreement check rather than a vote. When the swing sequence, the average and the efficiency ratio all point the same way, that is the small part of the time when a trend reading is worth acting on. When they split, the correct output is “no clear trend” — which is a legitimate answer and the one nobody wants to write down.
Doing that also fixes the retrospective problem. With one definition fixed in advance, a past call is either right or wrong; with three available, every past call can be justified by whichever method happened to agree. Pick the one your method needs, state it, and let the other two serve as a confidence check.
What trend analysis is not
It is not prediction. It describes what has happened so far.
It is not objective. Every method has a parameter you chose.
It is not timeframe-free. A reading without a chart interval is incomplete.
And it is not usually applicable. Seven bars in ten are not trending.
When it fails
In a range all three methods produce false readings in turn. The swing sequence flips at each boundary, the average is crossed constantly, and the efficiency ratio sits near zero — which is the one honest signal of the three, and the one people override.
The second failure is switching methods to keep a position. If the swing sequence broke and you moved to the moving average, the analysis is now serving the trade.
A third is analysing without a timeframe. It makes disagreement unresolvable.
A fourth is treating strength as direction. A weak uptrend and a strong one call for very different position sizes and the direction reading is identical.
And a fifth is doing the analysis at all in the seventy per cent. Most of the time the correct output is that there is nothing to read.
The original data
On this site’s shared 576-bar history the ten-bar efficiency ratio has a median of 0.34, with 30% of bars
scoring above 0.5. A 0.5% swing filter finds 175 turning points and a 3% filter finds 15, and the longest
run of consecutive higher highs at a one per cent filter is 4. The figures are in
research/series-measurements.json, produced by site/measure_series.py.
The 0.34 median is the figure to carry into any method you build. It says the base rate for trending conditions is low, so a strategy that assumes a trend is present will be wrong most of the time by default — and the fix is a filter that refuses to trade rather than a better direction call. Compute the efficiency ratio on your own instrument before anything else: it takes one formula, it needs no parameters beyond a lookback, and it tells you what fraction of the time your method’s core assumption actually holds.
Related
Trend following is the method built on this reading. Market structure is the swing version stated in full. And moving average is the line version and its lag.
The single most useful thing I ever did with trend analysis was write my definition down and stop changing it. Not because my definition is right - because a fixed definition means I can tell whether I was wrong, and a floating one means every past call can be re-read as correct.
— Michael Whitman
This page is educational, not financial advice. Test every idea on your own charts before risking money.