New Thoughts on Highs and Lows

One of the oldest technical trading systems was Donchian's 4 Week Rule.

It was a 1950's trend following system of basically buying 4 week highs and selling 4 week lows.  It took advantage of the fact that trends start with new long-term high's and low's.

Today's markets suffer from more volatility than in the past, and trend following systems are subject to whipsaws and large drawdowns.  As a result, trend-following is one of the most advocated trading styles, but most traders can't handle it psychologically.

My stock trading system is not trend-following in its basic format (though it could be modified and used with stops - but that is for a future post ;-) ).

However, I traded futures for many years with a trend-following system.

If I had to go back to trend-following, I would make use of new high's and low's.  However, I would also try and incorporate the fact that true trends continue to make new long term highs and lows, in quick sucession.

So, for example, if a new 4 week high is made, and a trend is under way, the 4 week high should be exceeded fairly quickly.  Then, it should keep on being exceeded.

Here is a way that you could play it:

Buy(Sell) N-day highs(lows), and stop out if a new N-day high(low) does not occur in, for example, a week.

Now, this isn't a complete trading system and its not tested.  Its just a different idea you may want to play around with.