The Theory Of Trends

      There is one more theory that dovetails with the Nomothetic Theorem. In a nutshell, the Theory of Trends says that history tends to repeat itself. This theory addresses the forces that cause system drift. It observes that, although they can be temporarily dislocated, basic forces tend to reestablish themselves into historically similar patterns. This conclusion means that trends tend to repeat themselves. Most trends are a factor of degree and time. Putting the previous two sentences together, the Theory of Trends says we can predict support and resistance points as well as future trends if we can document the history of the existing and prior trends.

      There is an old saying on Wall Street that "the trend is your friend". This is simply saying that established trends tend to persist. The best bet is a bet in the direction of an existing trend. A persistent trend is a signature of a stable system. Even when a trend changes as a system encounters an imbalance of forces, successive trends tend to be similar to prior trends when the system forces come back into balance. Thus, algorithms that describe prior historical trends tend to be useful as predictors of future trends.

      One other disconcerting aspect of trends is that scale is very important. What may appear as a solid trend on one scale may represent a major deviation on a larger scale. Understanding this fact will avoid the surprise when the short term trend reverts to the longer term historical norm.

Scale is important when identifying a trend.