Trend Analysis – The Core Fundamental of Technical Analysis
15 Jan
This entry is part 3 of 3 in the seriesTechnical Analysis Guide 101 - Getting Started
Technical Analysis Guide 101 - Getting Started
Basic Principles of Technical Analysis
Chart Analysis is Your Compass in Financial Markets
Trend Analysis – The Core Fundamental of Technical Analysis
Stock market trends offer the best profit opportunities. Position traders like to size up their investment holdings at the beginning of the trend and pyramiding it along the way as the trend continues. Stock market traders begin to dispose their equity holdings in stages when near the end of the trend as well as the beginning of the trend reversal stage. That is one of the profitable ways to trade the stock market. Financial markets trends also exist in various time frames simultaneously. Regardless of the types of strategies used in trading or investing in the financial markets, trend analysis is the core fundamental work of technical analysis and therefore it is our objective to spot trend as early as possible for maximum benefits and to reverse position once we have the confirmation of trend reversal.
Generally, stock markets have 3 types of movements at any one time.
Trending Upwards (Bullish)
Trending Downwards (Bearish)
Moving in Sideways (Correction)
The standard definition of uptrend is a succession of higher highs and higher lows. It is not sufficient to have just higher highs but not the lows of the market price oscillation or vice versa. Many beginners and experts have often times misjudge the trend or by making assumption of the trend when only the high or low has been broken. Most people called it bullish as demand outweighs supply and thus driving stock prices higher. As mentioned, time frame of stock observation is an important variable to consider when evaluating the strength of a trend. This uptrend basic chart pattern is only valid when the stock markets or any financial markets are trending. Stock market does often spend a considerable amount of time in sideways movement.
The standard definition for a downtrend is a succession of lower lows and lower highs. Most people called it as bearish as more sellers throw their shares than enough buyers to pick it up at higher prices. This is the situation when supply is more than demand resulting lower stock price.
When the stock market is not trending, then it is moving in sideways movement. We called it as bullish correction when stock prices are moving sideways with bias towards lower prices after a bull run. As for bearish correction, the stock market tends to rally up after a decline of a downtrend. Sideway correction is hard to determine by just looking at the highs and lows. However we have methods in technical analysis such as chart patterns, Fibonacci, Elliott Waves, trading indicators, volume analysis to help us to determine whether a stock price decline is a correction or a primary downtrend movement
All the stock price charts shown above is using horizontal trendlines to indicate the highs and lows of a trend support and resistance levels. There are other methods to draw up trendlines in technical analysis such as diagonal trendlines and moving averages. For now, we will introduce to horizontal trendlines for a start.
