Stock Trend Analysis: How to analyse a Trend, Trend Trading Strategies, Different Type of Market Trend.

Stock Trend Analysis: how to analyse a Trend

We saw that stock market trends provide critical insights into future stock price movements. Understanding market trends allows us to see beyond the obvious, and sometimes, prevents us from making crucial mistakes. But what is the point in simply understanding and not being able to spot such trends for yourself? In order to reap these benefits, it is important to be able to first spot market trends and then, decode them. In this section, we will try to do exactly this.

These are the movements in stock prices in a certain direction. This is usually for a longer term like a few days, weeks or months. We saw that stock market trends provide critical insights into future stock price movements. Understanding market trends allows us to see beyond the obvious, and sometimes, prevents us from making crucial mistakes. But what is the point in simply understanding and not being able to spot such trends for yourself? In order to reap these benefits, it is important to be able to first spot market trends and then, decode them. In this section, we will try to do exactly this.

Market trends are always taken into consideration when trading in stocks. Any seasoned stock trader will tell you that without knowing trends in the market,  traders find themselves lost. Trends allow you to know the direction the market is taking, upward, downward or stable, and also tell you something about potential future directions. Many traders study previous market trends that align with circumstances in a country. For instance, knowing about historical trends of the market during similar times of inflation or economic downturn may help to analyse a stock’s return potential. You may also be able to determine a particular sector to invest in by analyzing the markets regularly. 

It is important to grasp the functioning of any markets you trade in. 

How to analyse the stock market and what is Trend Analysis?

• Share Market Trend or equity market trend analysis is the process of analyzing current trends in order to predict the future trends. Using share market trend analysis, you can attempt to predict if a particular market sector growing now would continue to grow in the future. Or, will a market trend in a particular sector start a trend in another. This process of share market trend analysis involves a lot of data, but nobody can predict the trends accurately with 100% guarantee.

• Share market trend analysis is an aspect of technical analysis that tries to predict the future movement of a stock based on past data. A share market trend is based on the concept that the past movements are windows to the future trends. There are three main types of share market trends: short-term, intermediate-term and long-term. You can also classify trends as uptrend, downtrend or sideways trend. 

 

• Some information about markets and trends will give you insight into how markets work. In the bull and bear markets, the primary markets, history has proved that trends last for one to three years. If you do a share market study, you will learn that a secular trend can last even for up to a decade or more. This is a very long-term trend. Within any long-term trends, you may have intermediate trends that send business journalists and analysts into a spin. These may be sudden shifts in the current trend that move markets in an opposing direction to that which has been the trend for a while. For instance, after a period of an 8-month downward trend, a market suddenly shows an uptick, but these may be short-lived and are the result of equally spontaneous political or economic actions and reactions. 

Different Types Of Trends

Trend trading strategies play a vital role in every trader’s life because it helps them identify early trades to exit from the stock market when there is a reverse trend. Typically, there are three different types of trends given below.

•     Uptrend
•     Downtrend
•     Sideways trend

•    Uptrend

An uptrend is formed when a stock price of a trade is rising in value. When the market begins, several traders take advantage of an uptrend and enter a long position to reach high price levels.

For example:

If the share price of a particular increase by 30 $ and reduces by 15 $, and then again rises by 20 $, the share price is facing an upward trend since it is evidenced as higher highs and higher lows in price.

    

• Downtrend

A trader can see a downtrend when the stock price is falling in value. In the case of a downtrend, trend traders make their way and enter a short position, i.e., when the price is going down to the lowest possible point.

   

For example:

If the stock price decreases by 60 $ and then increases by 30 $ and then again falls by 20 $, a trader will see a formation in a downward trend. However, it is evidenced through lower highs and lower lows in the stock price in a downtrend.

    

• Sideways trend

The sideways trend is formed when the market remains static, i.e., the stock price neither reaches the highest or lowest price points.

    

Several professional traders involved in trend trading ignore this sideways trend. However, scalpers benefit with the help of short-term investments in the market to take advantage of a sideways trend.

What is Trend Trading?

Trend trading is a marketing strategy that uses several different marketing indicators to help identify the asset’s momentum in a specific direction.When the price is moving in one particular direction, such as upward or downward direction, then it is called a trend.

Several traders use these trend trading strategies because the trading market has an element of predictability that helps traders analyze and use it to their advantage.

A trader can forecast and analyze the trading based on various elements like past performance, price movements, historical trends, and more.

Trend traders usually try to accumulate gains by analyzing the asset’s momentum in a specific direction. When the price of an asset goes up and down, a trend is formed. So when a security is in an upward movement, a trend trader will likely take a long position and gain the large advantage of an asset. 

Trend Trading Strategies

Trend traders attempt to isolate and extract profit from trends. There are many different trend trading strategies using a variety of technical indicators:

• Moving Averages: These strategies involve entering into long positions when a short-term moving average crosses above a long-term moving average, and entering short positions when a short-term moving average crosses below a long-term moving average.

• Momentum Indicators: These strategies involve entering into long positions when a security is trending with strong momentum and exiting long positions when a security loses momentum. Often, the relative strength index (RSI) is used in these strategies.

• Trendlines & Chart Patterns: These strategies involve entering long positions when a security is trending higher and placing a stop-loss below key trendline support levels. If the stock starts to reverse, the position is exited for a profit.

Indicators can simplify price information, as well as provide trend trade signals or warn of reversals. They may be used on all time frames, and have variables that can be adjusted to suit each trader's specific preferences.

Usually, it is advisable to combine indicator strategies or come up with your own guidelines, so entry and exit criteria are clearly established for trades. Each indicator can be used in more ways than outlined. If you like an indicator, research it further, and most importantly, test it out before using it to make live trades.

What Are Examples of Trend Trading Strategies?

Trend trading strategies attempt to isolate and extract profit from trends by combining a variety of technical indicators along with the financial instrument's price action. Typically, these include moving averages, momentum indicators, and trendlines, and chart patterns.

Moving averages strategies involve entering into long, or short, positions when the short-term moving average crosses above, or below, a long-term moving average. Momentum indicator strategies involve entering into positions when a security is exhibiting strong momentum and exiting when that wanes. Trendlines and chart pattern strategies involve entering long, or short, positions when a security is trending higher, or lower, and placing a stop-loss below, or above, key trendline support levels to exit the trade.