How to do Trend Analysis?
In intraday trading, you need to monitor stocks’ price and volume movements to execute a successful trade. These data points move every second. However, how do you identify the right level to buy or sell a stock? A tool of technical analysis called market trend analysis can help you find the right levels.
Additional read: What is Intraday trading? A Beginner’s Guide
Before you learn the ropes of doing trend analysis, let’s understand what it means.
What is a trend?
A market trend is the general direction in which the price of a stock is moving. Depending on whether there is a bullish trend or a bearish trend, share prices could be moving upwards or downwards.
Trends do not always move linearly. The stock market is volatile. Share prices fluctuate wildly in the short term. Therefore, trends need to be analysed in the medium- to long-term. For a trend to be valid, it needs to sustain for a specific time. This can range from 10 days to 52 weeks or even longer.
If you identify price or stock movement within a day, it may not count as a trend.
What is trend analysis?
Trend analysis is a mechanism that can help you understand and predict the future movement of stock prices. Using market trend analysis, you can estimate whether a particular stock’s price is set to go up or down. You can use this information to execute trades. Various data to estimate the direction of stock price movements are used for trend analysis and apart from this, there are numerous indicators one has to understand to conduct trend analysis.
Additional read: Things to Know While Doing Intraday Trading
Three common indicators used in trend analysis
As a novice intraday trader, you can begin by getting a hold of the following indicators:
1. Moving Average
Moving average is a technical tool used to average out price points to create a line graph. You can take the average over 20 minutes, a week, 10 days or any other time period you choose. The flat line helps eliminate extreme fluctuations. An upward trend is at play if the moving average line angles up. If it moves down, it can be considered a downward trend. You can also identify support and resistance levels using moving averages.
2. Moving Average Convergence Divergence (MACD)
Moving average convergence divergence is a momentum indicator used to understand the movement of prices. To graph MACD, the exponential moving averages (EMA) of two separate time intervals are taken, usually at the closing price, and a EMA signal line is drawn. The crossing of these two line give bullish and bearish signals.
3. Relative Strength Index (RSI)
Relative Strength Index (RSI) is among the most common and popular indicators used in trend analysis. It is used to measure the overbought and oversold zones of a stock’s basis recent price movements.
How to do trend analysis?
Now that you have an overview of what a trend is and the common types of indicators to do market trend analysis, here’s how you can go about conducting trend analysis:
1. Pick a stock you want to trade
First, choose a stock you wish to conduct trend analysis on. Monitor the stock’s price and volume movements.
2. Identify data points
You need at least three contact points for a trend to be valid. Identify the points at which the price is moving.
3. Find the trend
Using technical analysis tools, identify whether a stock’s price moves upwards, downwards or sideways. Also, keep an eye on the slope since this establishes the validity of the trend.
4. Watch the time
The longer a trend seems to last, the more valid it will be. Observe the stock price movement and only act on it if you have a verified trend.
Trend analysis is a powerful tool that can help you trade better in the stock market. To be a successful intraday trader, make sure you understand different technical analysis tools and get a thorough grip on market trend analysis before you jump into it.
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