Stock Market Trends & Analysis
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To explain in simple words we can say a
market trend is a direction market or a asset price can take at a specific time, and it applies to all type of market such as foreign
exchange, commodities, stocks and bonds where price and trading volumes are
changing every now and then, the
person who is doing analysis is trying to predict before time that a market can
go upward making higher highs and higher
lows, resulting in the bull run in the market, on the other hand if market can
also downward making lower highs and lower lows, which is called bearish market, but keeping
both aside some time market is just
staying on the same level neither going up nor down hence this type of market
is said to be in sideways trend
Why it is
important to understand trend let us see an example for it,
We all have
heard a saying, trying to catch a falling knife?
Well this
works perfectly in stock market ,let me explain ,a market participant buy certain stock after a big and long fall in it
,hoping that now it will rebound and rise again, and he will book good profit
from it,
But the
stock does move a inch and continue to be in the same range, hence causing a
big loss to the investor.
This is
where market trend comes in you can avoid this by following the trends,
By
understanding the trends the trader or
investor to take the right decision to
make a trade or not.
Basic types Of trends and Analysis
BY now we
have developed the understanding about the trend and the oxford learner
dictionary also explains trend as a general direction in which situation is changing
or developing, it can apply in almost all context of life, like fashion, politics,
and social, but here today we will discuss only trend in stock market and try
to analysis them.
In stock
market we find three trends,
Uptrend
Downtrend
Sideways
On the basis
of analysis we should also look into,
Trends based
on time frame
Trends based
on direction
based
on direction
Based on
direction there are three type of trends
Upward trend (bull Market) –
upward or Bull market is generally seen as economic strength
and can be observed by strong demand and rising profits, when by looking at
chart you see peak which is higher than the last one and the troughs which are
higher the then the last one, and the same is repeated again hence forming
higher highs and high lows, then the market is in the Bullish trend,
The picture
will give a better clarity.
by studying the peaks and troughs we can analysis to a certain extent where market is going, now let’s understand Beer Market,
A sustained
period of falling prices particularly in
security market leads to a
downward trend ,which can driven by factors such as weak demand , declining
profits, and unfavorable economic
conditions,
If we see a
chart and see a peak lower than the last one and trough lower than the last one
and if this is repeated again and again then the formation become of lower
highs and lower lows, hence forming a Beer Market
The picture
below will help to understand the formation better,
Horizontal trend (sideways market)-
the market is very unpredictable can change
upward or downwards at any given point but at it instead of making higher highs
or lower low, it plan to relax on the same line, neither moving or downward
just moving sideways this kind of trend is called horizontal trend, for market investor traders this is a
time to stay away or go slow,
To give you a better understanding of this trend pls see
picture below.
what is trend trading strategy
There are
many strategies the trader use which may involve time planning, deep analysis of the market
before buying or selling any security, bond ,or stock, the aim is
always the same as how to make profit by buying at low and sell at higher
price.
There are
endless number of strategies and tool used in trend trading but we will discuss
here some of the popular strategies used by traders or market participant,
A) Flow with trend - As the
name suggest the investor uses the direction of trend to make the trade,
The first challenge is to identify the ongoing trend in the market which
can be tricky so we suggest that trader can make use of various trading tools
and concepts for identifying the market trend, once you have understood the
ongoing tend, then start for searching for trading opportunities that will
profit till trend continues
The benefit of this trend trading
is that if a trader catches a long lasting trend the profits potential can be
very large,
But trader must also see the other aspect as a trend trading trader, you
cannot always catch the complete trend, specially the
starting part of it you should always wait for trend to establish first
and then make a trade,
Hope you understand that like any other strategies trend trading needs
patience and discipline to follow precise rules, NO guess work or wild emotions;
it uses current market price, your risk tolerance level, and market
Volatility.
B) Range Trading- Investor prefer to
do range trading in the market is in weak trends and is in sideway moment
moving up or down in limited range between support and resistance.
In this if a trader wishes to make a long trade then he will enter around
the known level of support and exit at the known level resistance, and for
short trade he will do reverse, enter at the known level of resistance and exit
at known level of support, so this is how we trade in sideway or range market.
C) News Trading- the new trading is
based on the fundamentals aspects such as company earning , or any other new
from the company which will change public perception of the
people for the asset.
We can say if the company has shown profit in the quarterly results ,
then you can take long position ,and make profit till that trend last, can be
for a weeks to come.
There are many more strategies but we have discussed the popular one, we
will discuss more in article in near future.
Advantages of the trend
Advantages of understanding trend will offer several benefits
Like correct understanding the market, increased efficiency, informed investor,
with informed decision making, the investor or market participant can make more
informed decision on the basis historical data and trends to make better
prediction of the upcoming market momentums, thus helping the trader to stay
ahead of the upcoming curves.
Disadvantages of the trend
Like every aspect has positive and negative side, the market trend also
has certain advantages and disadvantages, we have discussed advantages in the
last point here we will understand some of the main disadvantages so let’s
start now,
a) Historical Data- past performance may not predict accurately the future market
conditions.
b) External factors- most important is that trend analysis
does not predict external effect on market like and Geopolitical event,
sudden market changes,
c) Inflation— trend
analysis can useless during inflations, as it does not consider price level
changes,
d) Turning points-
identifying the turning points can be difficult and challenging, the trend
analyst has to be careful while studying them.
The final Out come
To give a final outcome
we say that trend trading is widely used and accepted trading strategy in today
market, it focuses on market momentum to identify the ongoing trend.
The traders or market participant
can also make use of various analysis tools like moving average, trend lines,
and momentum indicators to recognize
the descent type of trend as primary, secondary, intermediate and minor trend,
so trader can adept the strategy as per market conditions and time frame.
The traders who follow
the trend strategies to make a trade can also use moving average, trend line,
and market momentum to establish the entry and exit levels as per the strength
of the trend,
The traders use this versatile trend trading in all forms of financial
trading including stocks, commodities, currency
And as well as indices, hope all the information is helpful for you,
Happy Trading
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