What is trend analysis?

What is trend analysis?

Trend analysis is an attempt to explain market movements as general directional tendencies of various strength over various time frames. Trend analysis also works to predict future movements based on the probability of a trend continuing.

The use of moving averages with support and resistance levels is the most commonly used methodology in trend analysis, and several trading strategies employ these tools in various ways. Trade volumespreads, news, crossover points, and other market factors are also considered in the discipline.

Trend analysis works to identify momentum in the market early enough to profit from increases or decreases in a directional tendency. Momentum theory is both simple and applicable to a variety of investors. It states that markets with up or down movement for some period of time cannot suddenly reverse their course. Utilizing momentum theory strategies is analogous to jumping on a freight train, riding it for a short period of time, and jumping off before it stops and reverses direction.

Certain environments may not generate enough momentum to get investors off the sideline – it frequently demands active trading, the investor will incur fees, and there is always the potential susceptibility to emotions and media hype.

Technical and fundamental analysis can be used to isolate momentum-affecting factors, for historical purposes or speculative ones. While some pundits will champion one over the other, it is generally best to take both types of analysis into account when making an investment decision. Fundamental analysis takes all the real-world information about a company into account when evaluating securities and acknowledges that shares are what they are: partial ownership in a company. The underlying belief of the followers of this theory is that future earnings of a company determine today’s stock price – the challenge is to evaluate these earnings far into the future. 

Technical analysis instead focuses on price movements, momentum, and trading bands to analyze securities and identify trends. Trends are analyzed for strength and probable duration. One example of a trend analysis method is ADX which stands for Average Directional Index. The ADX plots the strength of a trend in a security. Trend traders can use the ADX to spot and confirm trends, and then combine the ADX reading with other indicators to determine whether it makes sense to trade with the trend. When an ADX crosses above the 40-line and then cross back below it, it's likely a sign that the trend is over or reversing.

The ADX and other indicators seek to capture an ongoing bullish or bearish trend and invest with momentum. It’s often best to use the help of Artificial Intelligence to determine whether a trend is confirmed over the short or long-term. There are myriad ways to use technical analysis in trading, and which indicator or methodology a trader decides to use usually depends on their experience, skillset, and the quality of the tools (A.I.) available to help them find trade ideas.