|What is trend analysis?|
Trend analysis is a method which traders use to predict the future movements of the market. Trend analysis includes using prior market data such as price movements and traded volume. At last, traders and analysts try to predict the future movements of the market, using this data.
Trend analysis concept
Trend analysis is used for predicting the future movements of the market. Using this method in technical analysis, traders will be able to specify the trend of the market, and even identify some pivot points. Trend analysis is one of the main components of technical analysis, because moving with trends can be usually profitable. The main theory behind trend analysis is that what has happened in the past is likely to repeat itself. Generally, there are three types of trends: short-term, mid-term and long-term.
Trends show the direction which markets move toward. They could be upward or downward. Upward and downward trends are also called bullish and bearish trends respectively. It is notable that trends have no time limits. This means that a trend could stay as long as several seconds or last for a couple of months.
Trend analysis is a process, in which the next movement of the market is anticipated based on the current and prior trends. During trend analysis, traders try to understand if the current trend goes on or a new one is about to start. Meanwhile, the beginning of a trend in another market, could trigger a new trend in the market we are trying to analyze. Although trend analysis includes a lot of studying, it is unable to provide a certain result.
To start data analysis, you need to specify which market you want to analyze first. For example, you can focus on a certain industry like automotive, medicine or a certain kind of investment such as government bonds.
When you specified the sector you want to trade in, you can examine the data related to that sector. This information can help you determine the way this market is affected by the internal and external forces. For example, changes in a similar industry or a new law could be recognized as influential forces. Then traders would be able to use this data to predict the future movements of the market.
Trend analysis strategies
Traders who use trend analysis, adopt several trading strategies to be able to anticipate the market and make profit from its movements. There are numerous strategies which could be used in trend analysis. Each of these strategies use a certain group of technical indicators. Some of these indicators are:
- Moving Average: In this strategy, moving averages are used to enter the market. If the short-term moving average crosses above the long-term moving average, a buy signal is generated. Conversely, if the short-term moving average crosses below the long-term moving average, a sell signal is created.
- Momentum indicators: In this strategy, traders use momentum indicators such as Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD). For example, if the market moves in the upward direction with high momentum, traders tend to take long positions, and exit the market when the momentum starts to weaken.
- Trendlines and chart patterns: In this strategy, traders take long positions when the overall trend of the market is bullish. Meanwhile, they place their Stop Loss and Take Profit levels below the supporting regions, in order to prevent any further loss if the price of the security reverses and moves in the opposite direction.
Technical indicators could present the existing data in a more understandable way. These indicators can generate signals or warn traders about any possible reverses in the market. Technical indicators can be used in any timeframe. These indicators usually consist of several parameters that must be identified by the user.
It is recommended to use several indicators in combination to reduce the error and generate more reliable signals. Each indicator can be used in several ways. If you are interested in a certain indicator, try to read about it and test its performance before using it in the real market.
What is a trend?
Trend is the direction in which the market moves in a certain time span. Trends could be upward or downward. There are no minimum time spans to identify the direction of the market, but as a certain trend goes on, it becomes more reliable. Trends are shown with trendlines on the price chart of a security. Trendlines are formed by connecting highs and lows. If lows or highs are being formed on top of each other, the current trend could be recognized as an uptrend. Conversely, if highs or lows are forming below each other, the market is in a downtrend.
Trend analysis critics
Critics of trend analysis and technical analysis generally, argue that markets operate in an efficient way and the prices are the result of current events going on. This means that history doesn’t necessarily repeat itself, and future movements can not be predicted by studying the history of the market. For example, fundamental traders read economical reports and models to be able to anticipate the future of the market. This type of traders believe that the market moves in a totally random way that can not be anticipated with trend analysis.
If you want to be a technical trader, you should start by studying different strategies and technical indicators and testing different combinations to reach the one that you feel most comfortable with. The forex broker you choose plays an important role in the future of your trading career. Aron Groups Broker offers a wide spectrum of educational contents about both technical and fundamental analysis strategies. In Aron Groups Broker, you will also be able to create a demo account before entering the real market. Using a demo account, you can test your trading strategies and modify them until you find the best strategy that could make you real money in the real market.
Written by: Mohsen Mohseni (Aron Groups).