Trend analysis is a widely used technique that attempts to predict future stock price movements on the basis of recently observed trend data. As Kavan Choksi Japan says, historical data like trade volume and price moves are used for trend analysis, in order to forecast the long-term direction of market sentiment. Trend analysis is basically based on the idea that what has happened in the past can provide traders with an idea of what will happen in the future.
Kavan Choksi Japan offers an introduction to stock market trend analysis
Trade analysis typically tries predicting a trend, like a bull market run and subsequently rides that trend till trend reversal, like a bull-to-bear market, is suggested by the data. Trend analysis is advantageous as moving with trends, instead of against them, can lead investors to profit. Trends in the short market can be categorized under three types, short-, intermediate- and long-term.
A trend is a general direction the market is taking during a particular span of time. Trends might be related to bullish and bearish markets, both upward and downward, and so on. Even though there is no specified minimum amount of time needed for a direction to be considered a trend, the longer the direction is maintained, the more notable would be the trend.
Trend analysis involves the process of exploring the current trends with the aim of predicting the future ones, and is known to be a form of comparative analysis. This may include the attempt to determine if a current market trend, like gains in a particular market sector, is likely to continue, along with whether a trend in one market area could result in a trend in another.
Here are three major types of market trends that analysis must consider:
- Upward trend: Also referred to as a bull market, an upward trend implies to a sustained period of rising prices in a specific security or market. Such trends are commonly considered to be a sign of economic strength. They can be driven by a number of factors, like favourable economic conditions, rising profits and strong demand.
- Downward trend: Also referred to as a bear market, a downward trend is basically a sustained period of falling prices in a specific market or security. Downward trends are ideally considered to be a sign of economic weakness. They can be driven by a number of factors, like declining profits, weak demand, as well as unfavourable economic conditions.
- Sideways trend: Often called a range-bound market, a sideways trend is a period of relatively stable prices in a specific market or security. Sideways trends might be characterized by a lack of clear direction, with prices fluctuating within a relatively narrow range.
As Kavan Choksi Japan mentions, in order to start analysing applicable data, it is vital to first determine the market segment to be analysed. One may, for instance, focus on a specific industry, like the automotive or pharmaceuticals sector, along with a specific type of investment, such as the bond market.
