In the world of technical analytics, trend analysis is king. This makes a whole lot of sense. After all, the primary goal behind technical analytics is to break down charts and stock movement to locate trends and patterns so that wise decisions can be made. While a trend is defined as the general direction in which a market or a security is headed, obtaining this information and applying it correctly demands a little more sophistication beyond the base definition.
A trend analysis is an aspect of technical analysis that tries to predict the future movement of a stock based on past data. – investopedia
Spotting Trends on a Chart Isn’t Always Easy
In a perfect world, trend analysis would be as simple as checking out a company’s chart, seeing a line perpetually rising, and acting accordingly. This admittedly can sometimes happen with a market or a security, and when it does, it can be pretty glorious. More often than not, however, Wall Street simply doesn’t serve up trend data that easy to spot.
Often, you’ll see a stock chart filled with enough peaks and valleys to make you think you’re practically looking at an EKG chart. These ups and downs can muddy the works of stock performance right quick, which makes it look practically impossible to spot a trend at first sight. However, the savvy investors that do their homework won’t freak out when they see this kind of charts – even charts that appear to be extremely scattershot at the first glance provide plenty of news they can use.
Terms Within Trend Analysis
The best way to wrap one’s head around deciphering trend analysis is to dig into the terminologies that lie behind the general schematic. For instance, a chart containing a series of highs and lows can still contain a well-defined trend; it just needs to be looked at differently for the trend to be properly spotted. When the concept of technical analysis is applied, it’s wise not to try to view the line in a singularly linear format. Rather, it becomes imperative to view the chart movement as a series of highs and lows based on grouping the chart’s peaks in valleys. Doing so leads to the analysis of two sub-trends within trend analysis: uptrends and downtrends.
An uptrend is defined as being a series of higher highs and higher lows. Conversely, a downtrend is one that consists of lower lows and lower highs. Smart investors will spot uptrends and downtrends by noting that decreases or increases in a company’s stock will not fall below or above the previous lowest point of the stock in a given time frame. Fortunately, uptrends and downtrends are two of the three trend types that exist within trend analysis. Once an investor that’s gotten used to how technical analysis works, they can extrapolate data mined from uptrends and downtrends rather easily. While this apparently doesn’t eschew the notion of risk entirely – there is no such thing as a “sure thing” in the stock market – being able to view and work with these uptrends and downtrends makes can lead to wise decisions that may be able to mitigate losses or poor decisions.
The Sideways Trend
There is a third trend type that those deploying technical analysis must be aware of while they sift through charts – sideways trend. Also known as a horizontal trend, this particular trend dictates a time frame where there is little peak or trough movement one way or the other. Some may argue that this apparent trend isn’t a trend at all. Rather, it links to a lack of a well-defined trend moving up or moving down.
Whether you deem it as a trend or a non-trend, a chart that moves sideways is caused by supply and demand being nearly equal. It is often thought of as a consolidation period before the price continues in the direction the stock was moving. Because of this, technical analysists may find interest in tracking the horizontal movement of a stock in case they want to pounce on it once it resumes its prior course.
The Three Types of Trend Lengths
In addition to being known as an upward, downward, or sideways, trends can also be classified as a long-term, intermediate, or short term. Long term trends are considered to last longer than a year, intermediate trends are thought to last between one to three months, and short-term trends are thought to last less than a month.
Determining the accurate trend length is one that requires a bit of astuteness on account of the investor. For instance, a long-term trend is built from several intermediate trends, and these intermediates will often give the appearance of running counter to the overall long-term trend. The short-term trend breaks things down even further, as it is considered to be components of both intermediate and long term trends. These short term trends can run counter to an intermediate trend.
These trend lengths are critical for those that deploy technical analytics because their primary objective is to pick out these trends and extrapolate the data from the chart movement to make sound financial decisions. How they use the data depends on what their endgame may be in regards to the stock. For instance, someone looking to cash in on a short-term trend may be rooting for a markedly different result than a long-term trend, even though both investors are working with the same stock.
Trendlines – a Trend Analyst’s Best Friend
One of the most vital tools that can be deployed in trend analysis is also one of the simplest. A trendline is a basic technique of adding a line to a chart to represent the market or stock trend. This line provides a visual support line that indicates when people traditionally buy or sell the stock, depending on whether the line is drawn at the stock’s highs or lows. It’s effective because it provides simplified data to a chart, which can help add confidence to an investor’s decisions.
Even though there is a steady dose of simplification that is seemingly built around trend analysis, it is nevertheless a strategy that requires a healthy dose of skill and market savvy to use properly. It’s “up, down, or sideways” patina may look easy to follow, but as they say, looks can be deceiving.