You are probably familiar with the volatility of the stock market. It is also important to understand that stock prices are not likely to move in a specific direction in the short term. But when it comes to long-term pricing patterns, you will likely recognize a clear market trend. You will primarily observe three types of trends in the market.
Published on 01 March 2023
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Without a proper understanding of the types of trends in the stock market, you are less likely to see the face of profits. This article will familiarise you with the different trends evident in the stock market. But before that, you need to become aware of certain jargon.
Jargons to Understand Stock Trends Better
Some terms that you should become familiar with before digging deeper into the types of trends are as follows:
● Peaks or Tops
A stock chart contains several mountains and hills. The tip of the hills and mountains is known as the peak. The peak is the highest point. Therefore, when a stock price is at its peak, the stock has reached its highest price point.
● Troughs or Bottoms
You will come across a valley or trough when you turn a mountain upside down. The trough or valley is the lowest point. Therefore, when a stock falls to a trough, it is about to reach its lowest price point.
Types of Market Trends
The three primary types of stock trends are as follows:
● Uptrend
An uptrend is formed when the price of a stock rises in its value. Traders take advantage of uptrends when the market is beginning. Taking advantage of uptrends enables traders to enter a long position to reach high price levels.
Both the peaks and troughs of the share price chart will increase in case of an uptrend. Within a specific period of time, the price of a stock will reach a new height and fall low compared to the prices in the last few days.
However, the highs won’t be evident throughout the life of the stock. It is usually in contrast to the last few days, months, or weeks. The rise indicates a favorable position of the stock in the market. Therefore, you can expect the stock to appreciate in value instead of depreciating.
For instance, a share price increased by Rs 30 and reduced by Rs 15. It rose by Rs 20 once again. In this case, the share price is going through an upward trend, as evidenced by higher highs and higher lows.
● Downtrends
A downtrend occurs when the value of a stock price falls consistently. When a stock goes downward, trend traders usually focus on entering a short position. In this type of trend, both peaks and troughs will be low.
It means that investors consider the stock to be falling even further. Even the slightest increase makes investors sell their existing shares. Therefore, no additional purchase takes place in case of downtrends.
For instance, a particular stock price decreased by Rs 50 and increased by Rs 20. Once again, it fell by Rs 10. In that case, traders will see a downward trend with lower highs and lower lows.
● Sideways Trends
The sideways trend indicates a static market. It means that the stock price hasn’t reached either its highest or lowest price point. Professional traders usually choose to ignore the sideways trend.
Ending Note
Understanding the types of trends enables traders to earn more profits from trading than losses. Several traders opt for trend trading because the market has an element of predictability that can be used to the traders’ advantage.
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Understanding the types of trends in the market will help you figure out which stocks are expected to go up. Moreover, you will be able to determine the risk associated with a stock going upward or downward.
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The core maxim of investment is to set realistic expectations regarding returns, so you can plan your goals and achieve them. A simpler way to understand the importance of assuming practical returns on investment is through an example.
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The types of trends in the market are usually analysed on the basis of three typical time horizons, including short, intermediate, and long-term.
The Relative Strength Index indicator is useful for identifying the momentum in stock prices. It also provides knowledge about overbought and oversold signals.
Trend trading is a marketing strategy that revolves around using different marketing indicators. It helps with the identification of an asset’s momentum in a particular direction.
Trend analysis is a technique that focuses on predicting future stock price movements according to recently observed trend data. Trend analysis revolves around using historical data like trade volume and price movements to forecast the long-term direction of the market.
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