A Handy Guide to Technical Trend Analysis

All you need to know about technical trend analysis

Anyone who trades on the stock market has one primary aim: to book profits. To achieve this aim, the trader must monitor the share market live and carry out market research and analysis. The availability of different stock market software makes things easier. But there is no substitute for conducting thorough research. And a day trader depends, to a large extent, on technical trend analysis.

Technical trend analysis predicts the future price movements of stock based on recent trend data. A thorough analysis of past records provides an idea of what the future holds in store. There are three types of trends: short-term, intermediate, and long-term.

How do you gain from trend analysis?

Trend analysis provides data on market trends. A bull market indicates an upward trend, a bear market shows a downward trend, and a bull-to-bear market marks a trend reversal. If you want to earn from stock trading, you will need to move with the trend and not against it.

A trend shows the general direction of the market during a certain period. There is no stipulated timeframe. But trends are more notable when they persist over an extended period.

Trend analysis is comparative in nature as current trends are observed to predict future ones. Traders use it to determine whether the current market trend will gain traction in a particular market. Trend analysis may also indicate how long a trend will continue and how market trends could affect one another. You will need a large amount of data to conduct such an analysis. Stock market software could help you with this.

Trend traders use price movements and various technical tools to book profits even as they track the share market live. Here are a few popular strategies that they use.

  • Moving averages: In this case, traders enter into long positions when a short-term moving average goes above the long-term moving average. Similarly, they enter short positions when the short-term moving average is below the long-term moving average.
  • Momentum indicators: This trend trading strategy points traders to ‘go long’ when securities soar with strong momentum and to call off the trade when a security loses momentum. The relative strength index can provide notable insights.
  • Trend lines and chart patterns: Stock traders apply these methods to enter long positions when a security is trending higher. Here, a stop loss is placed just below the actual trend line level. Once the stock starts to reverse, they may exit to earn a profit.

Keeping in mind two key factors will help you make the right picks while day trading:

  1. Liquidity

Liquid stocks tend to have big volumes. So, you can buy a larger quantity without affecting the price. Large volumes make it easier to go in and out of trades.

  1. Volatility

You will find that day traders choose stocks that tend to move a lot. Any stock that moves 3% or more per day has the potential to make a large intraday move.

The bottom-line

Technical trend analysis gives you an idea about market trends based on stock price fluctuations. But stock trading based on just one kind of analysis can be risky. Make sure to carry out thorough research before making any trading decision. It may help to open a trading account with a large brokerage firm like Kotak Securities. Such firms have dedicated research teams which provide the latest market data and in-depth analysis of trends. This will go a long way in helping you make the right trades.

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