WHAT IS TREND ANALYSIS?
Trend analysis involves aggregating the information from multiple time periods and plotting the collected data and information on the horizontal line with the vision and goal of finding actionable patterns from the given data and info. In finance, this analysis is used for doing technical analysis and accounting analysis of stocks.
TYPES OF TRENDS
1. Horizontal or Sideways Trend:
This trend means share prices or asset prices as with the broader economy level are not moving in any direction as they are moving sideways, some time up and then down for some time. The direction of the trend can’t be affirmed or decided. It is the trend where investors are more worried about their funds invested and the government is trying to push the economy in the uptrend. Usually, the horizontal or sideways trend is considered risky because when sentiments will be turned against can’t be speculated or predicted and hence investors try to keep away in such a scenario.
2. Uptrend:
A bull market or uptrend is when financial markets and the assets in the broader level of economy move in the upward direction and their price keeps on increasing the shares or the assets or even the economy size over the period. It is a time of booming economy where jobs are getting created and the economy as a whole is moving into a positive market and the sentiments are favourable and the investment cycle has been initiated.
3. Downtrend:
A bear market or downtrend is when financial markets and the prices of assets at the broader level of the economy moves in the downward direction and the share prices or the assets or even the economy keeps going down over time. It is the time when companies shrink the production or shut down the operation due to a slump in sales. Jobs are lost and prices of the assets are declining, sentiment in the markets are adverse for further investment, investors run for the safe haven investments.
USE OF TRENDS IN TECHNICAL ANALYSIS
An investor can form and create his trend line from the historical share prices and he can use this information to predict the coming up and future movement of the share price. The trend can be related with the given information. Effect and cause relationship must be studied before concluding the trend analysis.
- In technical analysis, it can be used in the forex market, derivative market or share market. With slight alteration or change, the same analysis can be used in all kinds of markets.
- Trend analysis also inculcates finding patterns that are occurring over time, like a head and shoulder pattern or cup and handle pattern etc.
TREND ANALYSIS EXAMPLES
- Examining claims in expense reports for proof of fraud claims.
- Forecast expenses and revenue line items into the future for budgeting purposes and estimating future results.
- Examining pattern in sales to see if sales are going down because of specific products or customers or regions of sales.
- Examining line items of expenses to find out if there are any unusual expenditures in a reporting period that may require the need of further investigation.
THE CRUX
This article has been a true and apt guide to what is trend analysis and how it can be used in the markets. Here we have discussed the working of trend analysis along with the meaning and different types of trends. To learn more about finance, you can browse our other articles and to get your financial plan designed, get in touch with our experts now and start your journey towards wealth creation and financial freedom!
