Trend Analysis: Meaning, Example, Uses

If you’ve ever dabbled in technical analysis, the chances of you being acquainted with trend analysis are high. For the uninitiated, technical analysis refers to a trading discipline that is used to assess investments and discern trading opportunities. This is done by evaluating statistical trends amassed from trading activity. Factors like volume and price movement are worth noting here.

Defining Trend Analysis 

The definition of trend analysis has been broken down keeping in mind the following factors.

• Explanation of Trend Analysis: Trend analysis can be defined as a method that falls under technical analysis and which seeks to predict future stock price movements keeping in mind trend data that’s been recently observed. 
• Relevant Information for Trend Analysis: Data that’s made use of under this analysis is historical and focuses on price movements and trade volume. 
• Results Yielded from Trend Analysis: With this information, it is possible to forecast what exactly the long-term direction of the market’s overarching sentiments will be. 

Exploring the Mechanisms of Trend Analysis 

Understand how trend analysis operates by taking into account the following factors.

• The Function of Trend Analysis - The basic premise of trend analysis sees it attempt to predict a trend – say for instance a bearish market – and uses data to discern when the trend might reverse itself.  
• Value of Market Trend Analysis – This analysis lies in the fact that it helps identify the movement of trends. Provided investors move with the trend rather than against them they stand to make a profit. 
• Underlying Thought Process – Trend analysis is based on the idea of what has transpired in the past may again transpire in the future and thus traders ought to pay attention. 
• Types of Trends – The primary three forms of trends are short, intermediate, and long-term trends.
• The Direction of a Trend: A trend can be understood to be the general direction the market is working towards during a certain time frame. It is possible for upward and downward trends to prevail which are representative of bullish and bearing markets respectively. 
• Time Frame of a Trend – Although there is no outlined minimum time frame necessary for a direction to be deemed a trend, the more extensive it is, the more the trend is worth noting.
• Disclaimer – While trend analysis may employ ample amounts of data there are no guarantees that the results will be accurate. 

It is worth noting that trend analysis serves as a form of comparative analysis. It is often utilised when attempting to figure out whether or not a current market trend is likely to persist. Additionally, it is also used to discern whether a trend within a single market area could lead to a trend in another. 

Executing Trend Analysis  

Follow the steps mentioned below in order to do trend analysis.

Step 1. Begin by determining the market segment you would like to analyse. For example, you may wish to focus on one particular industry like pharmaceuticals along with a certain kind of investment such as the bonds market.

Step 2. Examine the selected sector’s general performance. Pay attention to how internal and external forces impacted it. These could be in the form of new governmental regulations being imposed or changes transpiring in a similar industry.

Step 3. This information would then be used to predict the direction the market will opt for going forward.

Strategies to Employ

When utilising trend trading strategies the aim is to isolate and extract profits from a given trend. Varied trend trading strategies employ varied technical indicators. Some of these have been touched upon below.

• Moving Averages – Here, long positions are entered while short-term moving averages cross past long-term moving averages. Similarly, short positions are entered in instances of short-term moving averages dipping lower than a long-term moving average. 
• Momentum Indicators – Strategies included here focus on entering into long positions in instances of a security trending with a solid pace of momentum. These long positions are exited in case the said security loses its momentum. The relative strength index (or RSI) is often employed under these strategies.
• Trendlines & Chart Patterns – Here, long positions are entered in instances of a security trending high, and stop-losses are placed below key trendline support levels. In instances of the stock starting to reverse, the position is exited such that a profit may be scored.

Summing up the Value of Technical Indicators

With indicators, it is possible to simplify price information, obtain trend trade signals and warn of reversals. These indicators can be applied to all time frames and employ variables that can be altered keeping in mind the specific preferences of a trader. 

Ordinarily, it is recommended to mix indicator strategies or else make your own guidelines. This helps ensure entry and exit criteria are clearly outlined for trades. It is possible for every indicator to be used in several ways other than those outlined. Should an indicator strike your fancy, research it some more and test it out prior to using it for live trades.

Final Thoughts 

Trend analysis can be a boon to traders provided they are adequately equipped with the tools & knowledge that is necessary to navigate the markets. Fi is cognisant of the value of trend analysis and encourages responsible and prudent trading. Visit the Fi website to learn more. 

Disclaimer: This blog is exclusively for educational purposes and does not provide any advice/tips on investment or recommend buying and selling any stock.