20/11/2019 Trend Analysis

TECHNICAL ANALYSIS TECHNICAL ANALYSIS BASIC EDUCATION

Trend Analysis
REVIEWED BY ADAM HAYES | Updated Apr 14, 2019

What is Trend Analysis?

Trend analysis is a technique used in technical analysis that attempts to predict the future
stock price movements based on recently observed trend data. Trend analysis is based on
the idea that what has happened in the past gives traders an idea of what will happen in the
future. There are three main types of trends: short-, intermediate- and long-term.

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KEY TAKEAWAYS
Trend analysis tries to predict a trend, such as a bull market run, and ride that trend
until data suggests a trend reversal, such as a bull-to-bear market.
Trend analysis is based on the idea that what has happened in the past gives traders
an idea of what will happen in the future.
Trend analysis focuses on three typical time horizons: short-; intermediate-; and
long-term.

What Does Trend Analysis Tell You?

Trend analysis tries to predict a trend, such as a bull market run, and ride that trend until
data suggests a trend reversal, such as a bull-to-bear market. Trend analysis is helpful
because moving with trends, and not against them, will lead to profit for an investor.

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A trend is the general direction the market is taking during a specified period of time. Trends
can be both upward and downward, relating to bullish and bearish markets, respectively.
While there is no specified minimum amount of time required for a direction to be
considered a trend, the longer the direction is maintained, the more notable the trend.

Trend analysis is the process of trying to look at current trends in order to predict future
ones and is considered a form of comparative analysis. This can include attempting to
determine whether a current market trend, such as gains in a particular market sector, is
likely to continue, as well as whether a trend in one market area could result in a trend in
another. Though an analysis may involve a large amount of data, there is no guarantee that
the results will be correct.

Examples Of Trend Analysis

In order to begin analyzing applicable data, it is necessary to first determine which market
segment will be analyzed. An example of sectors can include a focus on a particular industry,
such as the automotive or pharmaceuticals sector, as well as a particular type of investment,
such as the bond market. Once the sector has been selected, it is possible to examine the
general performance of the sector. This can include how the sector was affected by internal
and external forces. For example, changes in a similar industry or the creation of a new
governmental regulation would qualify as forces impacting the market. Analysts then take
this data and attempt to predict the direction the market will take moving forward.

Trend Following
Trend following is a trading system based on using trend analysis and following the
recommendation produced to determine which investments to make. Often, the analysis is
conducted via computer analysis and modeling of relevant data and is tied to market
momentum.

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Trend Trading Strategies

Trend traders attempt to isolate and extract profit from trends. There are many different
trend trading strategies using a variety of indicators:

Moving Averages: These strategies involve entering into long positions when a short-
term moving average crosses over above a long-term moving average, and entering short
positions when a short-term moving average crosses below a long-term moving average.
Momentum Indicators: These strategies involve entering into long positions when a
security is trending with strong momentum and exiting long positions when a security
loses momentum. Often times, the relative strength index (RSI) is used in these strategies.
Trendlines & Chart Patterns: These strategies involve entering long positions when a
security is trending higher and placing a stop-loss below key trendline support levels. If
the stock starts to reverse, the position is exited for a profit.

Indicators can simplify price information, as well as provide trend trade signals or warn
of reversals. Indicators can be used on all time frames, and have variables that can be
adjusted to suit each trader's specific preferences. Combine indicator strategies, or come up
with your own guidelines, so entry and exit criteria are clearly established for trades. Each
indicator can be used in more ways than outlined. If you like an indicator, research it further,
and most importantly, test it out before using it to make live trades.

Limitations Of Trend Analysis

Critics of trend analysis, and technical trading in general, argue that markets are efficient,
and so they already price in all available information. That means that history does not
necessarily need to repeat itself, and that the past does not predict the future. Adherents of
fundamental analysis, for example, analyze the financial condition of companies using
financial statements and economic models to predict future price. For these types of
investors, day-to-day stock movements follow a random walk that cannot be interpreted as
patterns or trends.

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Related Terms
Trend Trading Definition
Trend trading is a style of trading that attempts to capture gains when the price of an asset is moving
in a sustained direction called a trend. more

Technical Analysis of Stocks and Trends

Technical analysis of stocks and trends is the study of historical market data, including price and
volume, to predict future market behavior. more

Zig Zag Indicator Definition

Zig Zag indicator is used to identify price trends and changes in price trends. The indicator lowers the
impact of random price fluctuations, highlighting underlying bull and bear power. more

What Momentum Means in Securities

Momentum is the rate of acceleration of a security's price or volume. Momentum generally refers to
the speed of movement and is usually defined as a rate. more

Technical Analysis Definition

Technical analysis is a trading discipline employed to evaluate investments and identify trading
opportunities by analyzing statistical trends gathered from trading activity, such as price movement
and volume. more

Fakeout Definition
Fakeout is a term used in technical analysis when a trader enters a position, expecting a future price
movement. If the trade fails it is a fakeout. more

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