Trend Analysis
Posted by tktrader on August 16, 2009
Stock prices are always moving in the market. At times they trade sideways in range bound zones and sometimes they don’t seem to move at all but the vast majority of time is spent inside trends. A trend is simply a prevailing direction of movement. Bull markets trend upwards in price, bear markets trend downwards and so do their component stocks. Trends have varying degrees of strength as well as angle and direction. Some trends are very strong and tend to surge through time without taking breaks along the way. Other trends tend to be weaker and are often side tracked or abandoned altogether. In any case, it is important and potentially profitable to know the trend of the markets in order to maintain high confidence that you are trading on the right side of the price action.
Knowing that trends exist is not enough. They must be identified and categorized based on their strength, direction and validity.
Time and Price Method
The time and price method of trend identification is to take two snapshots in time and compare the prices of each of those snapshots.
* Bullish = most recent price is higher than earlier price (price has increased over time).
* Bearish = most recent price is lower than earlier price (price has decreased over time).
Moving Averages Method
The moving average method relies on the use of various moving averages to identify prevailing trends. Moving averages smooth the price action by averaging out the noise generated by intraday trading anomalies and small blips in price that are unlikely to have a serious effect on the underlying trends themselves.
