Trend analysis allows the financial investor to take an informed position on the financial markets.
The price of an asset never moves in a straight line, but in highs and lows. This is how Charles Dow, creator of the Dow Jones, defined the movement of prices on financial markets. Therefore, it is crucial for traders to know how to decipher trends if they want to not only avoid losses, but also maximize their gains. Wondering how to do this? Follow the guide!
Here is a comprehensive summary of the information you need to properly analyze trading trends and improve your profits.
In trading, trends reflect the level of confidence and agitation in the market. A trend can be bullish, bearish or neutral (in the latter case, taking a position is more uncertain).
Trend analysis looks at three major criteria :
Trend analysis is key to avoiding losses and maximizing your gains. Depending on the strategy you choose, the longer the time frame, the stronger the trend: thus, Position Trading will offer strong trends but also a greater risk of loss in the long run.
It is in this context that Charles Dow identifies three dimensions of trends :
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Analyzing trends in trading involves knowing how to select your technical indicators wisely, as well as the right times to take a position. There are two types of indicators that can be used in a complementary manner:
Note : Using several technical indicators is essential to correctly analyze trends, however they are likely to provide you with contradictory information. So be sure to select and prioritize them !
At the same time, it is good practice to identify support and resistance areas on your chart in order to better spot interesting points and know whether it is better to position yourself as a buyer or seller.
To have a clear vision of the state of the stock exchange prices, the unit of time of your graph will have to correspond to the chosen strategy. Preferably :
Good to know : no need for a formula to calculate your indicators; a decent broker will provide you with a platform that will do it for you!
Trading strategy, time scale and technical indicators used are three essential criteria to enable the investor to correctly analyze trends. However, the latter remains complementary to fundamental analysis in order to better understand macroeconomic impact on financial markets.