A stock trend is the general direction in which a security or market is headed and trending is one of the most important concepts in technical analysis. Following stock trends and having the ability to understand and identify trends is very important so that you can trade with rather than against them. Two important sayings in technical analysis are: the trend is your friend and don't buck the trend. These savings exemplifying how important trend analysis is for technical traders. SmarTrend® invites you to Trade the Trend®.
Technical Analysis of Stock Trends
Stock trends are not always obvious or easy to spot. In any given chart, you will probably notice that prices do not tend to move in a straight line in any direction, but rather in a zig-zag series of highs and lows. It is the movement of the highs and lows in technical analysis that constitutes a trend. For example, an uptrend is classified as a series of higher highs and higher lows, while a downtrend is one of lower lows and lower highs.
Types of Stock Trends
There are three basic types of stock trends—uptrends, downtrends and sideways or horizontal trends.
• An uptrend is when each successive peak and trough of the security is higher than the previous day’s data.
• A downtrend is when the peaks and troughs of a security are consistently decreasing.
• When there is little movement up or down in the peaks and troughs, it is considered a sideways or horizontal trend.
Technically speaking, you could say that a sideways trend is not actually a trend at all, but rather a lack of a well-defined trend in either direction. In any case, the market can really only trend in these three ways: up, down or not at all.
Stock Trend Lengths
Along with these three trend directions, there are three trend classifications. A trend of any direction can be classified as one of the following:
• A long-term trend
• An intermediate trend
• A short-term trend
In terms of the stock market, a major long-term trend is generally categorized as one lasting longer than a year. An intermediate trend is considered to last between one and three months and a short-term trend is anything less than a month.
Chart Use in Technical Analysis of Stock Trends
When analyzing trends, it is important that the chart is constructed to best reflect the type of trend being analyzed. To help identify long-term trends, weekly charts or daily charts spanning a five-year period are used by chartists to get a better idea of how the security or stock is performing over the long-term. Daily data charts are best used when analyzing both intermediate and short-term trends.
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