Trend Analysis In Share Market for Better Stock Picks

Have you ever wondered how some investors seem to always pick winning stocks? Well, one of their secrets might be trend analysis! In this blog, we'll break down what trend analysis is, how it works, and why it can be a helpful tool for choosing stocks.

What is Trend Analysis?

Imagine the stock market like a wave. Trend analysis is a way of studying past waves (stock prices) to predict where the next wave might take you. By looking at historical data, like price movements and trading volume, analysts try to understand the overall direction of the market, or a particular stock.

Trends can move in three main directions:

1. Upward Trend (Uptrend): This is when a stock's price keeps going up over time. (Example: If Reliance Industries' stock goes from ₹2,000 to ₹2,500 in a few months, that's an uptrend.
2. Downward Trend (Downtrend): The opposite of an uptrend, this is when a stock's price keeps falling. (Example: If YES Bank's stock goes from ₹100 to ₹75 over time, that's a downtrend.
3. Sideways Trend (Consolidation): Sometimes, a stock's price just goes back and forth within a certain range.

The saying goes, "the trend is your friend" in the stock market. This means that by understanding the trend, you can make better decisions about buying or selling stocks.

How to Analyse Trends

There are different tools and techniques used for trend analysis, but let's keep it simple for now. Imagine you're looking at a stock chart that shows the price history. Here are some things to consider:

• Is the price making higher highs and higher lows (uptrend)?
• Is the price making lower lows and lower highs (downtrend)?
• Is the price bouncing between certain ranges (sideways trend)?

Different Strategies

There are many ways to analyse trends, and we'll explore some popular techniques in future blog posts. These include:

1. Moving Averages:

• Imagine you're looking at a stock chart with lots of ups and downs. It can be hard to see the bigger trend with all that noise. Enter moving averages! These are lines on a chart that smooth out price movements by taking the average price of a stock over a specific period (like 50 or 200 days. They reveal the underlying trend, helping you decide if the wave is generally rising (uptrend) or falling (downtrend).
• Simple Moving Average (SMA): This is calculated by adding the closing prices of a stock for a specific period (e.g., 50 days) and then dividing by the number of days.

SMA = (Price (Day 1) + Price (Day 2) + ... + Price (Day 50)) / 50

Example: Let's say you're looking at the past 50 days of Infosys stock price. By calculating the 50-day SMA, you can see if the overall trend is up (rising SMA) or down (falling SMA).

2. Momentum Indicators:

These are all about speed. Momentum indicators measure how quickly a stock's price is changing. Imagine a wave gaining momentum, getting bigger and bigger faster. That's high momentum! Conversely, a wave that's losing steam would be low momentum. Momentum indicators can be helpful in identifying strong trends, especially when a stock's price is moving rapidly in a particular direction.

They measure how rapidly a stock's price is changing. A popular momentum indicator is the Relative Strength Index (RSI).

Formula: RSI = 100 - (100 / (1 + Average Gain / Average Loss))

Average Gain/Loss: This is calculated over a specific period (e.g., 14 days) by averaging the price increases/decreases during that timeframe.

Example: A high RSI (above 70) for a stock like HDFC Bank might indicate the stock is overbought and due for a potential correction. Conversely, a low RSI (below 30) could suggest the stock is oversold and might be poised for a rebound.

3. Trendlines & Chart Patterns:

• Trendlines: These are lines drawn along highs or lows in a stock's price to create a visual representation of the trend. A rising trendline connects a series of higher lows, while a falling trendline connects a series of lower highs. Breaking above a trendline can signal a potential breakout from the current trend.
• Head and Shoulders: This pattern resembles a head with two shoulders. If the price breaks below the neckline (support line), it could indicate a potential downtrend.
• Triangles: These come in different shapes (symmetrical, ascending, descending) and can signal continuation or breakout patterns depending on the formation.

However, it's important to remember that trend analysis is just one piece of the puzzle. The stock market is unpredictable, and past performance doesn't guarantee future results. Always conduct thorough research, consider other factors, and never rely solely on trend analysis before making any investment decisions.

By including trend analysis into your investment strategy, you gain a valuable edge in understanding the market's pulse.