By Vishweshwar HS, www.showmytrade.com
For a successful trade or investment, it is essential to note which direction the market/stock is heading. In other words, the trend or direction of the market is necessary to make a profitable trade, and if the trend reverses apply proper stop-loss to minimize loss.
Trend refers to the direction, course, tendency, swing, shift, or movement. In Stock Market Trend indicates the movement of Stock price. The price of the stock, whether it’s rising, falling, or range-bound, can study under a technique called Trend Analysis.
Under Trend Analysis, there are three types of Primary Trends which are as follows:
The upward trend refers to a process of gradual change in the stock price from lower prices to higher prices. Defined as a “Series of higher highs and higher lows.”
The uptrend, also known as a rising trend, is the trader’s favorite trend type. In this trend, stock price trends in upward directions by making a series of higher highs and higher lows. Though it is safe to make a buy decision anywhere in an uptrend, it gives the best returns when bought near pullback or intermittent lows.
Uptrend lines act as support. As long as prices remain above the trend line, the uptrend is considered intact. A break below the uptrend line indicates that demand has weakened, and a change in trend could be imminent.
A downward trend refers to a process of gradual change in the stock price from a higher price to a lower price. Defined as a “Series of lower highs and lower lows.”
A downtrend line has a negative slope and is formed by connecting two or more high points. Downtrend lines act as resistance. As long as prices remain below the downtrend line, the downtrend is intact. A break above the downtrend line indicates that supply is decreasing and that a change of trend could be imminent.
The sideways trend describes the horizontal price movement that occurs when the forces of supply and demand are nearly equal. A sideways trend is often regarded as a period of consolidation before the price continues in the direction of the previous move.
A sideways trend is defined as a “series of relatively equal highs and equal lows.”
Investors may also use trends focused on fundamental analysis. They are looking for data or parameters such as changes in top-line, earnings or bottom-line, or other business indicators.
For example, fundamental analysts may look for incremental changes in earnings per share. What rate is revenue growing? If earnings have risen year-on-year or quarter-on-quarter, which is a positive growth trend or if earnings declined for the past year or quarters, it is a negative trend.
Traders can use various trend technical analyses, including support & resistance lines, trend line, channel, price action, and technical indicators.
Many traders follow the same direction of a trend. At the same time, contrarians seek to identify reversals or trade against the trend. Uptrends and downtrends occur in all markets, such as stocks, bonds, and futures. Trends also occur in data, such as Whole Sales Price Index (WPI), Consumer Price Index (CPI), monthly auto sales numbers, etc. The trend can identify short-term, medium-term, and long-term based on the duration of the trade/investment.
Identifying the trend/direction is most important in both trade and investment.
The trend helps us what duration one is looking to trade –short-term, medium-term, and long-term. Trend reversal can be identified close to the position and position ourselves to the opposite side of the market. The trend-following systems are developed based on the trend.
Old market saying, “Make Trend your friend” for making an optimum profit. False break out is one significant limitation for the trend following traders/investors.
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