Trend analysis is an effective way to predict equity price movements. But, it requires a good understanding of the market and its movements. And, for this tool to result in profits, it needs to be applied to quality investments trading on major exchanges and not cheap penny stocks that are prone to the “pump and dump” type of hype. We refer to this as quality trend analysis. Here is a snapshot of the various aspects of quality trend analysis that you can use for profitable investing and trading.
Purpose of Trend Analysis
The reason to use this approach in investment and trading is to predict future prices. The rationale is that by finding a beginning or continuing trend, an investor can buy and ride the trend to continuing profits. And, when the trend is about to reverse, this system helps one decide when to sell. The end game is always to gain profits and avoid losses, which is why quality trend analysis of strong companies that are actively traded in high volume is more reliable and profitable.
Objectives of Trend Analysis
When you use trend analysis your focus will be short term, medium term, or long term. Or it can focus on all time horizons depending on if you are looking for short term profits or getting into a long term investment at the best possible price. You can apply trend analysis to both rising and falling market and to bull to bear reversals and bear to bull reversals. The objective is always to stay a step ahead of the market.
Weekly Trend Analysis
Traders who are looking for profitable swing trades will commonly employ weekly trend analysis. They are not applicable to day trading because they only summarize sequential weeks but are ideal for those looking to capitalize on trends that evolve over weeks and months. They are the most commonly used chart for trend analysis. These charts show a single point on a graph, bar, or candle for each week represented. By summarizing each week, these charts average out daily trading “static” like when you use important moving averages.
Seasonal Trend Analysis
Some stocks, like retailers, have seasonal peaks and troughs in their businesses. Seasonal trend analysis is designed to pick up on these trends and predict associated price movements. This approach typically works well for cyclical stocks whose cycles are at least partly driven by the calendar.
Ratio Trend Analysis
This technique fits well with trading based on analysis of intrinsic stock value. Ratio analysis looks at company liquidity, profitability, and efficiency of its operations. Ratio trend analysis follows these issues over time. Clearly, when a company’s financials are getting steadily better, or worse, it is an indication that the stock price will be heading up or down over time.
Wave Trend Analysis
This method goes back to the 1930s when Ralph Nelson Elliott discovered that “fractal waves” existed in the market and could be identified and used to predict price movement. He gained fame in 1935 when he predicted a market bottom that (for others) seemed to come out of nowhere. As with other methods, this tool can be used for up-trending and down-trending markets and well as for market reversals.
Trend Analysis Formula Example
A simple example of trend analysis is to look at company profits over several years. The process starts by picking a base year and then comparing all succeeding years to the base.
This can be done directly or as a ratio.
Amount of change = Current year amount – Base year amount
Percent change = (Current year amount – Base year amount) ÷ Base year amount
The key to any formula is that you need to be using meaningful numbers and only do quality trend analysis instead of working with inadequate or misleading data!