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How to Use the Concept of Mean-Time-to-Failure When Trading

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MTTF can tell you where price might go.

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MINYANVILLE ORIGINAL Yesterday multiple indexes tested swing point highs and failed. That is a reasonably good sign that some sort of retrace is about to unfold. There's another indication that the probability of a retrace is upon us as well, and that has to do with knowing how long the current trend has been in place. Not only does it tell us that a retrace is highly probable, but it also provides us with a measure of the minimum amount it needs to retrace. Let me explain.

The method that I speak of is a concept I borrowed from engineering. It is outlined in my new book, Trend Trading Set-Ups. It is based on the concept of mean-time-to-failure (MTTF). In engineering circles, MTTF is used extensively to understand expected product life cycles. To do this, samples are taken, statistics are drawn, and MTTFs are produced. If you think about qualified trends as having life cycles, then why not think about the MTTF of that life cycle? It's very easy to do, and it is useful as well.

Here's a chart of the short-term time frame of the S&P 500 (INDEXSP:.INX). The trend transitioned to bullish on June 15 and has remained in that state ever since. That was 47 bars ago.


Source: www.stockcharts.com
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