JUN 5, 2020 By : ATHUL RAJEEV, VENTESKRAFT.
Trend Analysis is a statistical technique that tries to determine future movements of a given variable by analyzing historical trends. In other words, it is a method that aims to predict future behaviors by examining past ones. Trend analysis is a technique employed by technical analyst in the financial industry to predict the future movements of a given asset. They employ historical data to determine the direction of the trend. The goal of this procedure is to identify attractive investment opportunities that are currently showing an upward trend; and of course, to identify downtrends too, so investors can get out before losing money.
Perhaps one of the disadvantages of trend analysis is that past behavior is not always consistent in the future, in other words, whatever the price of a given security did in the past is not necessary an indication of what it will do in the future because there are a lot of other significant elements that come into play when it comes to determining the value a financial security.
Along with using this technical analysis to maximize the potential for profits, an analyst can use it to understand the factors that may affect the value of the stock irrespective of general market conditions. For this, the analyst will also need to study the market and technologies, competition and financial conditions of the company.
TYPES OF TREND
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UPTREND
When financial markets and assets move in upward directions, resulting in an increase in the price. It is usually the time of boom in the economy, where overall sentiments are favorable.
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DOWNTREND
In the downtrend or the bear market, the economy, financial markets, and assets prices move in the downward direction. It is the time when companies shrink operations and overall investor sentiment is not favorable.
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SIDEWAYS / HORIZONTAL TREND
In this, the assets prices or the broader economy-level are not moving in any direction, rather are moving sideways. This means, moving up for some time and then down on the same level. It is a risky movement as investors are unsure of what will happen to their investment.
COMMON TREND TRADING STRATEGIES
There are several trend strategies or we can indicators that provide trade signals or warn of reverse movement. Following are the strategies or trading signals that analysts use the most:
- MOVING AVERAGES
- TRENDLINES & CHART PATTERNS
- MOMENTUM INDICATORS
HOW TO DO A TREND ANALYSIS?
First, determine the sector or industry or company or investment that needs to be analyzed, such as auto, pharma or a bond market.After, you select the sector; it is possible to examine its general performance. For this, one needs to study the internal and external forces affecting the sector, like changes in technology, any new governmental regulation or more.
Now, an analyst must use this data to predict the future direction of the item they chose.
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 thorough understanding of the market. Also, depending solely on trend analysis could prove dangerous. Thus, one must complement it with proper analysis of the past and current events
