What is Trend?
A trend simply reflects what seems to be going around at any given time. A trend can be in any area and doesn’t only reflect fashion, pop culture and entertainment.
A trend simply reflects what seems to be going around at any given time. A trend can be in any area and doesn’t only reflect fashion, pop culture and entertainment. There can also be a trend in the stock market to be bullish or bearish, depending on economic indicators, or a political trend reflecting a nation’s current mood. Some trends are fun, some fabulous, some appalling, but however long they last, you can be sure there will always be a new trend coming along to replace the old.
Trend is applicable to all time frame namely the short-term (ranging from minutes to hours), the medium-term (ranging from days to weeks), and the long-term (ranging from months to years). Different set of market participants will focus on the different types of trend. For example, a day trader will be more interested in knowing what the short-term trend is, while a long-term investor will be keener on knowing what the long-term trend of an asset is.
Successful trades can be made by identifying the trend as early as possible, and then riding on that trend until signs emerge that the trend is about to change or has already changed. ‘The trend is your friend’ is a very popular adage in the Technical Analysis community and it is hard to make any arguments against this adage given how well it has stood the test of time.
Types of Trends Analysis
Trend analysis is computed using numerical data. This information is usually historical data, either traditional data in the form of a company’s performance taken from its public financial statements or alternative data, such as the number of job postings of a competitor in the past five years. When adding numerical data to a chart, you will be able to identify three types of trends.
1. Uptrend – An uptrend is a sequence of rising peaks and troughs wherein each peak is above its previous peak and each trough is above its previous trough. As long as this sequence of rising peaks and troughs continue, the uptrend is said to intact. The chart below shows how an uptrend looks like.
2. Downtrend – A downtrend is a sequence of lower peaks and troughs wherein each trough goes below the previous trough and each peak falls short of the previous peak. As long as this sequence continues, the downtrend is intact. The chart below shows how a downtrend looks like.
Sideways trend – A sideways trend is a pattern wherein there is no clearly identifiable trend and wherein prices move in a lateral band. As long as such sequence of uneven peaks and troughs continue, the sideways trend is said to be in effect. The chart below shows how a sideways trend looks like.