A market trend represents the general direction in a market or a security. Trends can also be applied to interest rates, yields or any other market that features long-term movements in volume and price.
The length of market trends can vary between short-term, intermediate and long-term. In general it is better to trade with a market trend.
Therefore, when the trend of the market is upward, you should be more cautious when taking a position that will rely on the trend reversing directions.
Analyzing Market Trends
The analysis of market trends is based on historical price movements. Therefore, it is usually considered to be an element of technical analysis.
Technical analysis examines historical changes in price in an attempt to discern their future direction. Fundamental analysis, on the other hand, examines changes to an asset’s performance, such as revenue or earnings.
However, fundamental analysis will also note trends in revenue growth or earnings per share. For example, if a company’s earnings have grown for the last three quarters, this could be interpreted as a positive trend.
Traders will often use a trend line to represent the market trend in a security over a specified time period. A trend line is drawn between the lowest and highest point of a security’s price over that time period.
For example, a security that goes from $100 to $300 over a one month period could be represented by a one month trend line starting from $100 at the beginning of the month that goes to $300 at the end of the month.
Trend lines are also used to form channels marked by two separate lines. The top line is created by the trend in a security’s highs, and the bottom line is created by its trend in the lows. The expectation is that the price will continue to range between these two lines in the near future.