We fully believe in Trend Following - and in order to trend follow, we need a good way to assess the trend of the market and the tickers we are analyzing.

There are many, many ways to establish a trend for a ticker or market, from indicators such as rate of change, moving averages, stochastics, MACD and more to simple price action analysis.

The method IWR uses to assess a ticker's trend is called the Trend Roadmap.

It is based on a set of mathematical equations to assess both Short-Term and Long-Term Trends of a ticker.

We use math to remove the human emotion and opinion of chart and trend analysis - let's face it, 10 people could look at any given stock chart and come away with 10 different onions of where the trend is and what direction itt is heading.

Here is a breakdown of the Trend Roadmap Signals:

• GAS Signal - when both Short-Term and Long-Term Trends are up.
• COAST Signal - when the Short-Term Trend is down and the Long-Term Trend is up
• UTURN Signal - when the Short-Term Trend is up, but the Long-Term Trend is down
• BRAKE Signa - when both the Short-Term and Long-Term Trends are downl
• OVERHEAT Signal - When the RSI or Relative Strength Index (see "Definitions FAQs") is over 68, indicating a potential over-bought ticker.

The trends are determine by the:

• Short-Term Trend Signal - which analyzes the last 4-5 weeks of trading for a ticker (based on our algorithm).
• Long-Term Trend Signal -which analyzes the last year of trading for a ticker (based on our algorithm).

We also occasionally use the "Mid-Term" Trend Signal:

• Mid-Term Trend Signal -which analyzes the last 6 months of trading for a ticker (based on our algorithm).        

RSI, not to be confused with RS (Relative Strength), is a commonly used term in the trading/investing world. We use it extensively because of its' ability to quickly assess where a ticker is within it's recent price action.

We most often use RSI on a 14-day look-back, but sometimes use a 10-day look-back. 

Here's a good definition from Investopedia: 

RSI, or Relative Strength Index, is a technical analysis tool used to assess the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. It's a momentum oscillator, meaning it moves within a range (typically 0 to 100) and helps identify potential reversal points in price movements. 

RS, relative strength, should not be confused with RSI, relative strength index.

RS is used to compare tickers to each other to determine the performance of each ticker  "relative" to one another.

For example, if we're using a 90-day look-back period and QQQ is up 11% and SPY is up 7%, QQQ has a higher relative strength. Also, if QQQ was down 7% during that same period, and SPY was down 3%, SPY has higher relative strength.

At IWR, we use a variation of RS we call "VoMo", Volatility-adjusted Momentum, to assess the relative strength of tickers to each other - please see that FAQ below.

Here is a good definition of RS per Investopedia:

RS, Relative strength, is a strategy used in momentum investing and in identifying value stocks. It focuses on investing in stocks or other investments that have performed well relative to the market as a whole or to a relevant benchmark. For example, a relative strength investor might select technology companies that have outperformed the Nasdaq Composite Index, or stocks that are outperforming the S&P 500 index.

We also use an indicator known as the RSI, relative strength index, to help determine overbought or oversold signals. Please refer to that FAQ for more.

ATR, Average True Range, is a commonly used way to asess a ticker's volatility (propoensity to move around on any given day). We use it to help us determine the VoMo, Volatility Adjusted Momentum, for a ticker (please see the VoMo FAQ).

Definition from Investopedia: 

Average True Range (ATR) is a technical analysis indicator that measures market volatility by quantifying the average price fluctuation of an asset over a specified period. It doesn't indicate price direction, but rather, helps traders understand how much an asset's price typically moves on average, making it useful for setting stop-loss and take-profit levels. 

For our IWR process, Momentum is simply the tendency of a trend to continue until some action or catalyst stops it. We chose ROC, rate of change, to measure it, which is simply a measure of how much a ticker price has changed over a certain period of time.

Here is a defintion:

In the stock market, momentum refers to the speed or velocity of price changes in a stock, indicating the strength of a trend. It signifies the rate at which a stock's price is increasing or decreasing over a specific period, suggesting the continuation or potential reversal of a price movement.

In the stock market, the rate of change (ROC) is a momentum indicator that measures the percentage change in a stock's price over a specific period. It essentially shows how quickly a stock's price is rising or falling. A higher ROC indicates a stronger price increase, while a lower (more negative) ROC indicates a stronger price decrease.

VoMo, volatility adjusted momentum, is a derivation of RS, relative strength, in that we use it to compare tickers to each other to determine where there is relaitve stregth and weakness.

How is VoMo calculated? We simply to the Momentum % (rate of change) of a ticker and divide it by it's volatility %, as measured as ATR.

For example, for the QQQ ETF:

• The Momentum (rate of change) over the last year is 22% for example, meaning the ETF is up 22% over the last year. 
• The ATR currently is 1.1%.
• So, the Long-Term (year) VoMo is 20.0 (22% / 1.1%).
• This allows us to compare QQQ with other tickers to assess relative strength.

Why do we adjust for volatility? We don't have to, but we are trying to take volatility out of the assessment, since tickers can have very different volatility levels. 

At Invest with Rules, we are risk managers first and foremost, because if you lose your capital, it's "game over"!

So, in order to manage risk, we need to have a way of measuring it.

The process we have decided to use is to Identify the amount of $ we are willing to lose when we take each trade - and then we convert it into a % of the ticker purchase price.

Here's an example:

• You have a $100,000 account.
• You have decided you are willing to lose no more than $1,000 per trade in order to protect your capital.
• You decide to buy the QQQ ETF and set your initial stop loss at 5% of the purchase price.
• If you are buying QQQ at $500 with a stop of $475 (price - 5% of $500).
• With a $25/share risk, you can buy 40 shares (your maximum risk of $1,000/$25 = 40).
• So, your risk on this trade, or "Risk Unit", is 5% or $1,000.