Trend Analysis helps to determine future movements of a variable on the basis of its historical trends and behavior. Trend Analysis is a statistical tool for predicting future movement or trends of any value based on its historical data. For doing a trend Analysis we need historical data and this data can be a plot against time and a chart pattern will emerge. Analyzing this chart pattern will give a trend for a probable future move. There is no specific amount of time for a movement to become a trend. However, the longer the movement, the better it is.
Trend Analysis for Share Price:
As we just discussed trend analysis, it can be used in identifying the trend of share prices, and based on trend future trade can be done. In share market trend Analysis is very popular and used extensively. Trend analysis gives a smooth chart pattern and an investor or a trader can make a better decision after analyzing a trend in the chart pattern. If you see a candlestick chart pattern and a simple moving average chart pattern trend then you can easily take decision based on trend chart moving average.
In the share market, trend analysis is a technique to determine the probable future movement of a stock. It is a part of technical analysis and predicts the stock movement on the basis of past performance.
The primary objective of using this technical analysis is to locate potential investment opportunities. A trend can be both upward and downward or sideways Studying trend it also helps to determine the entry and exit point of current stock so that investors don’t lose money and can get the good trading opportunity in beginning.
For example, just imagine there is a stock growing in price 1% on a daily basis for 4 days and there is another stock going down by 2% every day. Now suppose you have to do a buy decision then which stock you choose? If you are selecting the stock which is growing by 1% on daily basis then you are on the right path because it has a high probability of going up 1% up next day as well and on other hand, the stock going down 2% on daily basis has a higher chance of going down further. Generally, a trend continues in the same direction unless there is any sign of trend reversals. After each trend reversal stock price goes in the opposite direction.
Types Of Trends:
Uptrend
It is the trend in which share prices move upward directions, resulting in an increase in the price over a period of time. It is usually the time of boom in the economy, where overall sentiments are favorable. This cycle is also known as the bull market where share prices increase.
Downtrend
In a downtrend market, share prices move on the lower side with time and this phase is also known as a bear market. In a market where sentiment is low and business activities are decreasing, share prices go down as well.
Sideways Trend
In this trend, share prices are not moving in any direction, rather are moving sideways in a rangebound manner. When there is no growth and also no decline in economic activities, the market goes in a sideways trend. It is also known as an indecisive market and it can be very risky for any investor. We should wait for an uptrend or downtrend to enter the market.
Common Trend Analysis Tool:
Moving Average
In this, one can enter long positions when the short-term moving average goes above the long-term moving average. On the other hand, one enters a short position when the short-term moving average goes below the long-term moving average. As shown in the below images:
Short Term Average goes below Long Term Average: (Sell Signal)
Short Term Average goes above Long Term Average: (Buy Signal)
Trend Line and Chart Pattern
Using this strategy, one enters a long position when the trend line is moving up. When initiating such positions don’t forget to put a stop-loss below key trendline support levels. Below is an image showing an Uptrend move for Reliance Share Price.
Trend Analysis can't be taken as exact because it's just a predictor, the move can go against the trend any time but if we take the trend analysis in the account then it increases our chance of getting share price movement as per our analysis.
Trend analysis is one of the most popular ways that analysts over the world use to determine the movement of a security. However, it is not an easy task and requires eyes on details and a thorough understanding of the market. Also, depending purely on trend analysis could prove dangerous. So, one must complement it with proper analysis of the past and current events.
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