In ‘How To Read A Book’, Mortimer Adler taught readers a process to obtain maximum benefit from a reading, Notwithstanding the fact it was written in 1972, it is still the finest example of its genre. Indeed its lessons have application to thinking and listening.

Tonight I’d like to consider one part of Adler’s processes in relation to to ‘The Nature of Trends’.

The first step to the Adler’s second stage is: Identify and summarise in one sentence the theme of the book. The theme for Nature of Trends is: the market has a non-random structure that can be viewed with Barros Swings.

Step two is to break the book down into its essential component parts, starting the most important parts and using a top-down approach. For Nature of Trends, the essential component parts are:

  1. The nature of Barros Swings: what do the various swing sizes represent and how do Barros Swings relate to the Tubbs Model?
  2. The relationship and function of time frames
  3. The difference between congestion and change in trend patterns; the various types of corrective patterns and the various types of change in trend patterns.
  4. The relationship between strategy and trend
  5. The essential components of Low Risk Entry
  6. The two components of Risk Management: Trade Management and Money Management

Let’s turn to item (1) and break that down to its essential ideas.

Barros Swings are unique swing charts- well almost unique. Joseph Hart’s ‘Hart Swings’ (http://www.trend-dynamics.com/) are very similar to Barros Swings. The difference lies with the filter Hart uses.

Barros Swings are different to normal swings in that normal swings are either:

Barros Swings are both time and price based. Because of this, we are able to see the relationships of swings to time frames e.g. the 13-week period swing on a weekly chart corresponds to a quarterly trend. And because we see these relationships, we can draw conclusions about the impact of the higher time frame on the lower. Why is this important? Because a correction in a higher time frame tends to be a change in trend in the next lower time frame. Knowing this, we are less likely to be caught by surprise when a change in trend aborts.

Let’s now turn to the Tubbs Model and Barros Swings. Figure 1 shows the Tubbs Model

05-21-2008-tubbs.jpg

FIGURE 1 Tubbs Model

In the Tubbs Model, a market goes from Accumulation to Breakout to Trending (Mark-up) to Distribution to Breakdown to Trending (Mark-down) etc. If markets weren’t fractal, then all we’d need to succeed is to define the trend, define our changes in trend, know the difference between complex corrections and changes in trend and, know the difference between impulse and corrective moves. Easy!

But markets are fractal and this complicates matters. But it also allows the Barros Swings to come into their own.

  • Barros Swings allow us to calculate the mean and standard deviations of the impulse and corrective moves of a swing size. In this situation, we can then assess whether a move against the prevailing trend is impulsive or corrective. When I made the Gold call on CNBC (I was looking for Gold to bottom around $850), it was based on this idea - if we  were in an 18-d correction, then $850 was about a normal corrective price target and 30 to 35 trading days was about the normal time target.
  • The stats help us draw distinctions between complex corrections and changes in trend. We need this tool because not every new high in an uptrend is an impulse move.

In addition, Barros Swings help us distinguish between impulse and corrective moves and, allow us to allocate different functions between time frames by making it easy to distinguish between different categories of price action.

I wrote this piece with a view to making Nature of Trends an easier read. Hopefully it provided some assistance. For new readers of this blog: if you go to the free section of this Blog, you’ll find a video on how to draw Barros Swings.

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