Have you ever observed the daily ups and downs in the price of a stock while looking at its price chart? However, there is a market pattern that lies underneath all of these daily changes. Over a longer length of time, this may be observed.
Technical analysis is all about catching this market trend. You would look at previous price patterns as a technical investor to generate a judgement on market trends. As a result, you will choose your strategy for dealing with a stock. This is why it’s critical to be aware of market trends. That is what this part will cover: what are market trends, how to use them in stock selection, how to recognise market trends, and how to analyse them in order to make lucrative investments.
WHAT EXACTLY IS A MARKET TREND?
Stock prices may be erratic in the near term, as we mentioned in a previous section. They aren’t always moving in a straight line. When you zoom out and look at somewhat longer-term pricing patterns, though, you’ll see a more clearly defined market trend.
A trend is the wide rising or downward movement of a stock’s price over time, in general. An uptrend is defined as a trend that moves upward over time, while a downtrend is defined as a trend that moves downward over time. Investors have a habit of purchasing equities that seem to be in an uptrend and selling those that appear to be in a downturn.
Stock prices, on the other hand, move in a zig-zag pattern. We don’t determine a pattern in technical analysis by looking at how much up or down a stock price has moved over time. We focus on the details, such as how much the stock increased in a bull market and how little it decreased in a down market. To put it another way, we look at how high the stock price rose – the top – and how low it fell – the bottom.
PEAKS OR TOPS:
The term “peak” conjures up images of mountains. Similarly, if you look at a stock chart, you’ll see a lot of hills and mountains. Even in stock market jargon, the tip is referred regarded as a peak. The stock price peak or top is the highest price the stock has ever reached, much as the highest point on a mountain.
TROUGHS OR BOTTOMS:
If you flip the mountain over, you’ll get a valley or trough. It’s the lowest spot on the planet. Stock charts, too, feature a ‘bottom’ or ‘trough’ – the lowest price at which the stock has fallen.
Both the peaks (tops) and troughs (bottoms) of a stock chart continue to rise in an uptrend. As a result, every day or so, the stock price reaches a new high and then falls back to its prior level. Don’t get me wrong: this doesn’t have to be a lifelong high. It might also represent the stock’s highest point in the last several days, weeks, or months. The fact that tops and bottoms have been steadily rising shows that the market is in a favourable mood. It believes that the stock has a better possibility of appreciating than depreciating. As a result, more investors purchase, pushing up the price. Similarly, when the stock price drops, investors perceive it as a chance to acquire even more. They do not wait for it to return to its former position. They purchase the shares first. This brings the descent to a halt.
Let’s say a stock traded at Rs 60, Rs 52, Rs 63, Rs 55, Rs 65, Rs 57, and Rs 69 during the past seven weeks. Each peak—Rs 60, Rs 64, Rs 65, and Rs 69—is higher than the one before it. Each dip is also higher than the one before it. This is a traditional upward trend.
Some uptrends, on the other hand, are characterised by prices dropping more often and increasing less frequently. This will be discussed later in this part. Even if the stock continues to rise, you are taking a huge risk by investing in it.
CONTRARY TO OPINION, THERE ARE DOWNTRENDS IN
A downtrend is a pattern in which a stock continues to decrease. Not only are subsequent peaks and troughs lower, but they are also lower. This indicates that market participants believe the stock will continue to decrease. Investors exploit each little increase in the stock’s price to sell their current quota of shares. At these levels, no additional purchases are made. No matter how low its price has gone, such a stock should not be purchased, particularly if you are a short-term investor. If you’re a long-term investor, you may want to hold out until the stock price drops much further.
A stock in a sideways trend does not move significantly in either direction for a long period of time. Peaks and troughs remain consistent, and there is no substantial movement to consider when deciding whether to purchase or sell a stock.
WHY IS IT IMPORTANT TO KNOW MARKET TRENDS?
Patience and determination are required for all good things to happen. Even if this seems complex, hang in there and put it into practise in your finances.
Market trends are significant because they inform you which stocks are likely to rise and how much danger there is along the road. You may miss out on big rewards if you sell before the price reaches its high. Similarly, if you purchase before the price drops to its lowest point, you may end up making less money when you sell it.
HOW DO YOU DETERMINE MARKET TRENDS?
The many types of market trends have previously been discussed. Now, using an example, let’s look at how to spot market patterns.
Assume the price of a hypothetical stock was Rs 35, Rs 38, Rs 27, Rs 40, Rs 24, and Rs 41 at the conclusion of each of the preceding six weeks. A stock like this would have a price chart that looks like this:
A Stock’s Price Chart
If you look attentively, you’ll see that each time the stock drops, it drops by a larger proportion than the prior time. Each of the stock chart’s three troughs—Rs 35, Rs 27, and Rs 24—is lower than the one before it. Similarly, whenever the price increases, it does so at a slower rate than previously. Take note of how the rise from Rs 38 to Rs 40 and subsequently to Rs 41 is progressive.
Because the stock has gained from Rs 35 to Rs 41, a first-hand assessment would imply that it has performed well. However, a closer examination reveals that the appraisal was of poor quality.
The stock has only increased by around 17% total in this situation. However, it has dropped by as much as 40% on one occasion. Why would someone take such a great risk for such a little gain? This is why it’s crucial to be aware of market trends.
Trend analysis is the process of analysing market trends in this manner. A ‘trendline’ is an important part of technical analysis.
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It is vital that you grasp what a trendline is in order to execute good technical analysis. A trendline is a line that links all of the troughs or all of the peaks on a stock chart. A trendline that links the peaks may be used to illustrate the rise of a stock over time.
A trendline connecting the troughs might help you keep track of the stock’s dangers. You can also combine the two trendlines to examine the overall price trend of a stock over a certain period of time. A channel is the intersection of two trendlines. We’ll look at trendlines in more detail in a later part.
MARKET VALUE MAY NOT ALWAYS APPROACH INTRINSIC VALUE:
Investors’ risk tolerances and return expectations vary. They may adjust their portfolios to these needs by studying stock market patterns. For example, if you’re saving for retirement, you may want to put your money into secure equities. You’d put your money into stocks that have a decent chance of increasing in value without experiencing abrupt price drops. You may choose moderately upward-trending equities with upward-trending troughs by using technical analysis of stock trends.
Your choices, on the other hand, may alter if you are a relatively new investor. You’d probably be able to take a little more of a chance. As a result, you’d utilise your knowledge of market movements to choose equities with a significant rise in peaks. In exchange, you may be willing to tolerate a minor reduction in troughs.