Trend plays an essential role in our daily life. Everything depends on the latest trend. The mobile we use should go with the latest trend. Otherwise, it won’t have the features of new technologies. We must ensure that the dress, vehicle, and all of our products are in line with the trend.
Likewise, Trends play a significant role in Technical analysis. A trend is the direction of the market as a whole or a stock’s price. The essential elements in trend formation are Peaks and Troughs. The peaks and troughs may be ascending, descending, or stays flat. By joining the peaks and troughs trendlines are drawn. The trendlines give you the direction of the market or the share. Look at the below chart of Nifty futures. Peaks and troughs are marked. It’s an ascending peaks and troughs
Trends are used in fundamental analysis too. If the company’s earnings are good for the last 5 years then the company is in a positive trend. If it has poor past performances, then the company is experiencing negative growth and so it is in a negative trend. Trends can be identified in charts using historical price charts. Using the charts, trendlines can be drawn which will guide us to take our positions and help us to identify early exit from our positions whenever there is a reversal in the market.
In this article, we will see in detail the major trends in technical analysis. Generally, trends are classified into three types. They are
When the stock price goes up for some time, forming higher highs and higher lows, an Uptrend is formed. An uptrend line can be drawn with the help of the stock’s peaks and troughs. The stock price does not move in a straight line. it will go up for some time and again come down a little and again move up than the previous high price. This type of stock movement will create higher highs or ascending peaks and ascending troughs. This type of trend is called an Uptrend.
At each higher low, traders are deciding that the pullback in price is a good time to purchase more of the stock. The buying pressure of more and more investors deciding to buy the stock adds more demand and it takes the stock to a higher price than the previous high. This can be shown on the stock chart as the stock continues to move in an uptrend. Look at the example below of an uptrend chart.
When the stock price goes down for some time, forming Lower highs and lower lows, a downtrend is formed. A downtrend line can be drawn with the help of the stock’s peaks and troughs. The stock price does not move in a straight line. it will go down for some time and again come up a little and again move down than the previous low price. This type of stock movement will create lower highs or descending peaks and descending troughs. This type of trend is called Downtrend.
Whenever there is a downturn, sellers start to panic and try to get out of the stock. When more and more sellers try to dispose of their stock, pressures prices lower and helps the trend to continue lower. The stocks try to move up but the panicked sellers keep on pushing the stock’s price to a lower level than its previous lows. Look at the example below of a downtrend chart.
The horizontal price movement that happens when the forces of supply and demand are nearly equal is termed the “Sideways Trend”. The sideways trend is formed when the market remains static, i.e., the stock price neither reaches the highest nor lowest price points. The prices travel range bound. Professional traders involved in trend trading ignore this sideways trend. However, scalpers benefit with the help of short-term investments in the market to take advantage of a sideways trend. Look at the example below of a sideways trend chart.
Many of us have heard the quote “The trend is your friend”, but the quote doesn’t end here. The full quote is, “The trend is your friend, until the end when it bends.” The booming trend analysis is to identify the trend reversals and again go with the trend. A strong technical analyst should be able to identify the difference between minor and significant changes in price levels. The reversal patterns can be best identified along with support and resistance levels. These trend lines must be combined with technical indicators to capture the best price levels for trading. In our upcoming article, we will discuss in detail the Support and Resistance levels.
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