What is a Detrend?

Malcolm Tatum

A detrend is a strategy that focuses on stripping down the amount of data related to a trend so that only the key factors that motivate change are identified. There are several different ways to determine what data is relevant to a trend and what is not. Removing what is sometimes referred to as red noise makes it easier to project where the trend will go in the short-term, allowing investors to gain a better understanding of what type of returns to expect and when to sell off and move on to another investment.

Businessman giving a thumbs-up
Businessman giving a thumbs-up

Most of the methods used to identify a detrend involve some sort of regression process. Here, the idea is to look backward at how the trend developed, and identify the leading events or influences that continue to exert some type of influence on that trend. In the process, the detrend makes it much easier to disregard ancillary events that are not likely to continue feeding the trend, and plot the movement for the next month to six months. If the goal is to earn some sort of return within that shorter period, the regression approach helps to set reasonable expectations for that return.

As the result of using the detrend strategy, investors can get a better idea of what type of return can be reasonably expected, based on the factors that will either promote or discourage the trend in the short-term. From this perspective, this type of data manipulation helps to eliminate any factors that are not likely to be of value during in the near future, while still allowing for the possibility of those factors to exert reasonable influence over the long-term. For investors who wonder if a given investment will fare well under the current trend for a month or so, this approach is often a great way to assess potential performance, make wise choices in buying and selling securities, and maximizing returns for that period.

One of the tools that is often used in this process is the detrend price oscillator. This is essentially a simple tool that makes it possible to identify any major turning points in the long-term cycle of the trend, plot when they will exert influence, and thus determine if any of those points will take place in the short-term. Technical analysis of this kind makes it easier to establish an expectations index for securities that are affected by the trend, and simplify the process of forecasting short-term results that can aid investors in making the right investment decisions.

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