You’ve probably asked yourself at least once “what exactly is a trend?” Is it just an elaborated fad? Is it a collection of patterns? In this article, we’re going to go over what makes a trend valuable to investors and how to find market trends to help with your investing journey.
What is a market trend?
A trend is a general direction a product, service, or idea moves over time. A market trend is the basic definition that’s applied to a market for a specific trading instrument, like a stock.
Uptrend
A trend will be considered an uptrend when prices are generally rising. It’s denoted by higher highs and higher lows – this means that prices are not falling below recent previous lows. Higher highs and higher lows is the key pattern to identify uptrends.
Downtrend
Downtrends are just the opposite to uptrends – lower highs and lower lows. When you hear the words fear, recessions, tightening policy, they usually are followed by some form of a downtrend.
Sideways / Range
Sometimes the market falls into a range without a clear direction of heading up or down. These are common during uncertainty as well as lower volatility.
What creates market trends?
World events happen and psychology plays a role. The state of a market indicates how people feel about it, so investments increase if people feel good. The opposite is true if people are fearful or uncertain.
Market forces
Anything could affect a market, but there are some specific ideas and events that happen that you should be aware of. These are:
- Economic data
- GPD, inflation, jobs are some big ones
- Interest rates & central bank policy
- Corporate earnings
- Investor psychology
- Technology, demographics, regulation
Trends exists at different time frames
A strong determining factor of the validity of a trend is its timeframe. Long term trends are analyzed based on how many years its rising – it would be absurd to analyze a trend as long term if you’re only looking at one week’s worth of data.
- Short term -> days to weeks
- Medium term -> months
- Long term -> years
What’s causing the move?
When an event happens that affects the stock market, you must make sure to keep it in perspective. If a news story breaks out that causes the price of a stock to jump up, how long would you expect that momentum to last? A long term trend is unlikely to form from a news story. This is an example of one event and its likely time frame of market moves.
- Short term drivers (days to weeks)
- News headlines
- Earnings reactions
- Economic data releases
- Social media hype / panic
- Medium term drivers (weeks to months)
- Earnings cycles
- Sector rotation
- Policy expectations (rate cuts)
- Positioning shifts by institutions
- Long term drivers (months to years)
- Interest rate cycles
- Inflation regimes
- Technological adoption
- Demographics
- Structural regulation changes
Look for agreement in timeframes
What exactly is meant by agreement? Let’s use an example.
You look at a monthly chart and its making higher highs and higher lows. You switch over to the most recent weekly chart and its also making higher highs and higher lows. This is an agreement between the two timeframes and agreements tend to favor whatever kind of trend its in. This example would of course be an uptrend, and there is one more piece of data you want to know. Look for price to stay about some key support level like a 200 day moving average. A long term trend is occurring, and there are many more examples than this one alone.
One of the best platforms to analyze charts and find market trends is TradingView. It’s UI is very easy to use and offers many tools to help you analyze price movements for any security you’d like to focus on.
Conclusion
There are many more agreement strategies I’d like to discuss in another article here. Make sure to hang around for when that comes next and check out the latest articles to learn even more.