How to Analyse Stock Market Trends & its Advantages| Espresso

How to Analyse Stock Market Trends?

The potential of gaining unlimited profits has attracted several investors to the stock markets. Stocks are one of the oldest instruments in which you can invest your money and gain very high returns. For some people, the stock market profits are their only source of livelihood. As many as 1.43 crores new investors opened their Demat accounts to invest in the share markets in the FY21.

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However, you need to remember that the stock markets involve a fair bit of risks. If you aren’t smart and diligent with your investments, you can quickly lose all your money. Therefore, you need to analyse share market trends and place your bets accordingly carefully. If you’re investing in derivatives, it becomes even more crucial to conduct stock market trend analysis and predict accurate price movements.

In this article, you will learn how to analyse stock market trends using various indicators and technical tools. Let’s start by discussing what a market trend and trend analysis is.

What is a Market Trend?

The share market trend refers to the direction in which the prices of stocks are moving. In the equity markets, the prices of stocks can go up or down at any time. When the markets are moving upward, they are said to be showing a bullish trend, and when the markets are moving downwards, they are said to be showing a bearish trend.

For a movement to be considered as a trend, it has to be there for a significant duration. For example, an upward movement can be considered as a trend only if the market continues to move upwards for an entire trading day or a trading session. The longer a trend continues (either upward or downward), the consequential it becomes.

What is the Market Trend Analysis?

The stock market trend analysis refers to the process of analysing and understanding the current trends in the stock markets. This helps an investor in predicting the price movements of shares in the future. Through share market trend analysis, you can predict how a particular segment or stock can perform in the future and place your trade orders accordingly.

The process of stock market trend analysis is extensive and involves a lot of past and present data. Therefore, although it can help you make speculations for future market movements, there is no guarantee of 100% accuracy. But most of the time, you would be able to make profits if you could analyse share market trends with precision.

How to Analyse Market Trends?

By now, you must be familiar with the advantages of market analysis. But you might be wondering how to do so. Below are a few strategies you can use for analysing share market trends:

  • Trendlines and chart patterns

Trendlines are a sequence of lines and curves drawn on a chart by connecting a series of upper price points and lower price points of various stocks. These trendlines together form a pattern that helps in identifying how a stock has moved in the past.

You can use trendlines and chart patterns to identify the support and resistance levels of stocks. This can help you enter or exit a trade. Trendlines can also help you place stop-loss orders at resistance or support levels. You can also predict trend reversals when a stock is trading at its support or resistance level.

  • Momentum indicators

Momentum indicators can help you determine the strengths and weaknesses of stocks. They indicate the speed at which the price of a stock is changing at a given point in time. For example, if a stock has moved by 20% in three days, the momentum indicators will show a high momentum. Similarly, if a stock takes two months to move by 10%, the momentum indicators will show a low momentum.

When a stock is in high momentum, you can expect the trend to continue and hence, enter a long or short position depending upon the market direction. On the other hand, if a stock is losing momentum, it indicates trend reversal and, therefore, is a sign that you should exit your trades.

There are several momentum indicators, with the Rate of Change (ROC) and the Relative Strength Index (RSI) being the two most common ones.

  • Moving averages

Moving averages refer to the data that shows the average price movements in stocks during specific periods. The main purpose of using moving averages to identify the share market trend is to negate the impact of short-term fluctuations on stock prices.

When you see that a stock is trading above its moving average, you can assume that an uptrend can continue for some time. Similarly, if a stock is continuously trading below its moving average, it is a signal that the downtrend can continue.

To Conclude

Indian stock market trend analysis is a complex thing. Although you can never be sure of the market movements, a share market analysis can help you identify the ongoing trends and take your trade positions accordingly. It’s prudent to use more than one market analysis strategy to improve the accuracy of your predictions.

Share Market Knowledge Centre

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Frequently Asked Questions

There are three types of share market trends – short-term trend, long-term trend, and intermediate trend. The definition of these trends depends upon the period for which they continue. For example, if you notice a similar market trend for a few months, it can be termed as a long-term trend.

When a stock’s price is rising and making new highs, it is said to be in an uptrend. During an uptrend, you will notice several peaks in chart patterns. A downtrend is the opposite of an uptrend. When a stock’s price is declining, it is said to be in a downtrend. A downtrend is characterised by several troughs in chart patterns.

Technical analysis of stocks helps in identifying the current market trend. It involves the use of technical indicators to study price movements of securities in the past. On the other hand, fundamental analysis involves digging into the balance sheets of companies to know their intrinsic market values.